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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the fiscal year ended March 31,
    2002                                                

Commission file number 0-18756

Western Water Company

(Exact name of registrant as specified in its
charter)


(www.wwtr.com)


|                                                      |  |                                     
|----------------------------------------------------- |  | ------------------------------------
|Delaware                                              |  | 33-0085833                          
|(State of incorporation)                              |  | (I.R.S. Employer Identification No.)
|                                                     
|102 Washington Avenue,
    Point Richmond, California |  | 94801                               
|(Address of principal executive
    offices)          |  | (Zip Code)                          

Registrants telephone number, including
area code: (510) 234-7400

Securities registered pursuant to
Section 12(b) of the Act:

|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.001 par value

Right to Purchase Series E Junior
Participating


Preferred Stock, $.001 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to filing requirements for the past
90 days.     Yes þ          No o

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of July 11,
2002 was approximately $6,127,423 (based on last reported sale
price of $.78 per share of common stock on that date). All
directors are considered affiliates. There were 8,069,012 shares
of registrants common stock outstanding as of
June 17, 2002.

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrants Proxy Statement for
its 2002 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission within 120 days after
the close of the registrants fiscal year, are incorporated
herein by reference in Part III of this Report.



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TABLE OF CONTENTS



|             |                                                                                                         |  |  |  |  |  |  | 
|------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                                       
|             | Item 2. Properties                                                                                     
|             | Item 3. Legal Proceedings                                                                              
|             | Item 4. Submission of Matters To A Vote of Security Holders                                            
|PART II     
|             | Item 5. Market For Registrants Common Equity and Related Stockholder Matters                          
|             | Item 6. Selected Financial Data                                                                        
|             | Item 7. Managements Discussion And Analysis Of Financial Condition And Results Of Operations          
|             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|             | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III    
|             | Item 10. Directors and Executive Officers of the Registrant                                            
|             | Item 11. Executive Compensation                                                                        
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|             | Item 13. Certain Relationships and Related Transactions                                                
|PART IV     
|             | Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports On Form 8-K                  
|SIGNATURES  
|EXHIBIT 21  
|EXHIBIT 23.1



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TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 2  | 
|Item 2.  |  | Properties                                                                                         |  |      | 15 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 16 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 16 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 17 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 18 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 19 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 29 | 
|Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data                                       |  |      | 30 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 30 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 30 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 30 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 30 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 31 | 
|PART IV 
|Item 14. |  | Exhibits, Consolidated Financial Statement
    Schedules and Reports On Form 8-K                   |  |      | 31 | 

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Forward-Looking Statements

In addition to historical information, this
Annual Report contains forward-looking statements. The
forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results
to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections and
subsections entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Risk Factors. Readers are cautioned not to place
undue reliance on these forward-looking statements, which
reflect managements analysis only as of the date hereof
based on information currently available to management. Western
Water Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described herein and in other documents
the Company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on
Form 10-Q to be filed by the Company in 2002 and 2003 and
any Current Reports on Form 8-K filed by the
Company.




PART I




Item 1.     Business

Introduction

The principal business of Western Water Company
(the Company) has been to identify, manage, acquire,
develop, sell and lease water and water rights in the western
United States. Prior to 2000, the Company had been developing
this business through the acquisition of water rights and other
interests in water, the purchase of real estate for the water
rights associated with such real estate, and the sale or lease
of water. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as a limited amount of real
estate, in California and Colorado.

As noted, the Companys principal activity
to date had been to acquire and develop water assets in
California and in the Cherry Creek basin in Colorado. The
Company did so because it believes that there is a growing
demand for water resources in both of these areas in which
demand is expected to exceed the water resources currently
available. However, the Company has encountered significant
regulatory obstacles to its attempts to develop and transfer
water for delivery to potential customers in California. During
2001, these regulatory obstacles were compounded by the electric
energy crisis in California, which rendered many transfers
uneconomic because of the high and unrecoverable cost of pumping
water over long distances. Therefore, the Company deferred
certain planned water transfers and retained certain supplies in
storage reservoirs. In addition, the process for developing the
regulatory framework and physical infrastructure necessary to
complete commercial deliveries in Colorado has taken longer than
originally anticipated. As a result, the Companys water
sales were lower during the fiscal year ended March 31,
2001 than in the prior fiscal year. The Company did not complete
any new water sales during the fiscal year ended March 31,
2002.

Based on its inability to generate revenues from
water sales, the Company suspended its asset acquisition
program, reduced its marketing activities, curtailed other
overhead expenditures, and deferred certain development
activities. The Company is concentrating its current efforts in
California on overcoming the regulatory obstacles to water
transfers and in arranging water transfers that do not face such
obstacles. The Company is also increasing its efforts to assist
non-affiliated water rights owners to develop and manage their
water rights for maximum long-term value.

In addition to pursuing a viable wholesale water
transfer business and advising other water rights holders on
protecting and developing water rights, the Company is
continuing its efforts to develop its own existing water assets
in both Colorado and California. The Companys principal
Northern California water assets consist of certain riparian and
appropriative water rights, together with certain groundwater
rights, associated with approximately 9,055 acres of real
property (the Yuba Goldfields) located along the
Yuba River, and the water rights associated with approximately
1,372 acres of California rice farms and ranches located in
Yuba County (the Farm Properties). The Company does
not own the fee title to the Yuba Goldfields, but

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the Company does own fee title to the Farm
Properties. During the fiscal year ended March 31, 2002,
the Company concentrated its efforts in Yuba County on
protecting and developing both its water and real estate assets.
To that end, the Company made certain capital improvements to
its Farm Properties, including constructing an all-weather
access road and leveling additional farm land to improve
productivity. The Company has also participated in negotiations
for the extension of water delivery canals to and annexation of
two of the Farm Properties for the purpose of developing a
conjunctive use (river water/groundwater) project in cooperation
with two related water agencies in Yuba County. Another one of
the Farm Properties in Yuba County is being developed as an
environmental mitigation site for regional construction
projects, including projects planned by the Company. In
connection with developing the mitigation site, the Company
solicited and received a letter of interest from the California
Department of Transportation to use the site to offset projected
impacts from local road improvement projects.


The Companys Southern California water
assets consist primarily of adjudicated groundwater rights in
the Mojave Basin and shares in the Bear Valley Mutual Water
Company (BVMWC) which shares include the right to a
proportionate share of the water available under BVMWCs
perfected water rights. The Company expects to sell these shares
in fiscal 2003 as a part of its previously announced program of
selling non-strategic assets. During the fiscal year ended
March 31, 2002, the Company participated in the Mojave
Basin adjudication proceedings ordered by the California Supreme
Court in City of Barstow et al. v Mojave Water Agency.
Those proceedings have not been concluded, so the Company has
leased its Mojave Basin water rights under a year-to-year lease
pending judicial clarification of the nature and extent of the
underlying rights. During the fiscal year ended March 31,
2002, the Company commissioned a third-party valuation of its
BVMWC shares. The valuation was completed during the fiscal
year, and the Company has continued to arrange short-term leases
of its shares to a local city water department pending the sale
of these shares. The Company expects to sell its Mojave Basin
water rights and its shares in BVMWC in fiscal 2003 as a part of
its previously announced program of selling non-strategic
assets. The Company also owns approximately 247 acres of
real estate in San Bernardino County. The Company will list the
remaining real estate for sale in fiscal 2003, and expects to
dispose of the real estate as subdivision approvals and market
conditions allow.

The principal Colorado water interests owned by
the Company consist of the water rights associated with an
aggregate of 4,559 acres of land and certain other water
rights in the Cherry Creek basin. This land is in the drainage
area of Cherry Creek, south of Denver, in Douglas County,
Colorado. It was purchased by the Company in 1992 and most of
the land has since then been sold. However, the Company has
retained almost all water rights from the land that was sold.
The Cherry Creek assets were acquired primarily for the purpose
of developing, selling or leasing water in the Cherry Creek
basin. The Companys real estate holdings in Colorado
currently consist of approximately 408 acres of primarily
undeveloped land located in the Cherry Creek basin.

The Companys principal executive office is
located at 102 Washington Avenue, Point Richmond, CA 94801. Its
telephone number is (510) 234-7400. Unless the context
requires otherwise, references to the Company in
this report include Western Water Company and all of its
subsidiaries. On September 18, 1992, the Company changed
its name from YG Development Company to
Western Water Company, and on March 23, 1994,
the Company changed its state of incorporation from California
to Delaware.

Overview of Water Markets



| |           
| | ----------
| | California

There is a developing public policy to expand
water markets in the western United States to help meet the need
for increased water supply and reliability because of population
growth and chronic imbalances between areas of water abundance
and areas of deficit. The objectives of this developing public
policy include improved clarity of water rights, access to
existing conveyance facilities at a fair price, and competitive,
price-sensitive allocation of scarce water resources. These
policies favoring voluntary water transfers as a means for
meeting long-term imbalances between supply and demand were
emphasized in the August, 2000 Record of Decision for CALFED, an
ambitious water resource planning agenda for the federal and
state agencies which oversee water resource and environmental
planning in California.

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Southern California has been experiencing a water
shortage that is projected to become worse. According to the
State Water Plan (Bulletin 160-98) of the California
Department of Water Resources (DWR), last updated in
November 1998, the amount of water used in Southern California
is estimated at 10.5 million acre-feet in 1995, and is
expected to grow to 11.4 million acre-feet in 2020. Even
assuming the development of a number of new water resources and
significant additional conservation efforts over the forecast
period, the shortage of water estimated at
200,000 acre-feet in 1995 is estimated to grow to
1.3 million acre-feet by 2020, as the available supply is
expected to decrease from 10.3 million acre-feet in 1995 to
10.1 million acre-feet in 2020. Although such deficits have
historically been made up through overdraft of groundwater, this
source is already under severe strain and limitations on
availability are expected to constrict the overall supply in
certain areas of California.

Several recent legal actions have increased the
perceived risks of continued reliance on overdrafting
underground aquifers as a means of balancing supply and demand.
First, the California Supreme Courts August, 2000 decision
in City of Barstow v. City of Adelanto(the Mojave
decision) has required complex negotiation among
groundwater producers on remand to the trial court. Second,
important conflicts over reliance on a shared groundwater basin
have been set for trial in an evolving adjudication case
(Santa Maria Valley Conservation District v. City of Santa
Maria et al.) that is being carefully watched for possible
precedent. Finally, in light of controversy surrounding the
possible extension of state-wide regulatory authority over
groundwater, the State Water Resources Control Board (the
SWRCB) commissioned a thorough study of groundwater issues
under California law. That study, authored by Joseph L. Sax, a
law professor at the University of California, (Review of the
Laws Establishing the SWRCBs Permitting Authority over
Appropriations of Groundwater Classified as Subterranean Streams
and the SWRCBs Implementation of those Laws)
(the Sax Report) was published on January 19,
2002 and supports extension of SWRCB jurisdiction over
groundwater. The SWRCB has not taken any action based on the Sax
Report. The Company believes that uncertainty over the
reliability of groundwater rights  particularly in
overdrafted basins  enhances the attractiveness of
voluntary water transfers as an alternative source of reliable
supply.

During the fiscal year ended March 31, 2002,
there were several important developments in furtherance of
water transfer policy within California: (i) completion of
a large, cross-Delta water transfer between agricultural
interests in the Sacramento Valley and a San Joaquin Valley
agricultural irrigation district (the Forbearance
Agreement), (ii) negotiation of a water rights
settlement process aimed at avoiding a complex and contentious
proceeding to assign environmental responsibilities as between
water rights owners north of the Delta and export water users
south of the Delta (the Sacramento Valley Water Management
Agreement, referred to herein as the SVWMA), and
(iii) passage of legislation requiring new, large-scale
real estate development to demonstrate, as a condition of land
use approval, that there is a water supply sufficient to meet
the developments needs at build-out (SB 221 and
SB 610, together the Water Supply Assurance
Laws). Although none of these developments contributed to
any new revenue for the Company during the most recent fiscal
year, policies and precedents set in these contexts generally
improve the environment for price-sensitive, willing
seller/willing buyer water transfer transactions. The Company
believes that further progress in implementing water transfer
policy will provide future business opportunities for the
Company.



| |                          
| | -------------------------
| | The Forbearance Agreement

Direct negotiations between a south-of-Delta
agricultural water purveyor and a group of Sacramento Valley
agricultural water agencies led to a synthetic transfer of water
across the Delta. The transaction essentially involved the
Sacramento Valley interests forbearance of the
diversion of irrigation water to which they hold rights in
exchange for a payment by the south-of-Delta user. That is, the
upstream users arranged their affairs so as to reduce their
licensed diversions and leave water in the Sacramento River for
downstream appropriation for the benefit of the buyer.
Completing the transaction required the active participation and
facilitation of the United States Bureau of Reclamation
(USBR). The forbearance water that was
left in the Sacramento River was diverted by USBR from the Delta
through Central Valley Project facilities for delivery to the
buyer. The transaction avoided the time, cost and complication
of seeking SWRCB approval because USBR exercised its own junior
appropriation rights to seize the forbearance water when it
reached the Delta. The transaction was valuable not only because
it illustrated that such arrangements can be quickly

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completed among willing parties but also because
USBR explicitly determined that the actual incremental cost of
facilitating the transaction approached zero. The Company
believes that the completion of the Forbearance Agreement
demonstrates the viability of large-scale, cross-Delta water
transfers. However, the Forbearance Agreement specifically
recites that it sets no precedent, and an effort to replicate
the transfer in 2002 has apparently been thwarted by
intervention of DWR. There can be no assurance that such
transfers can be completed in the future nor is it clear that
the Company would be allowed to participate in such a transfer,
even if it were replicated.




| |      
| | -----
| | SVWMA

The SVWMA is a current attempt to negotiate a
settlement of contested water rights as between water rights
holders located upstream of the Delta and entities that hold
water rights in or downstream of the Delta. These long-standing
disputes were deferred by the Bay/ Delta Accords negotiated in
1994. However, the issues were brought to a head because of
pending SWRCB proceedings to allocate responsibilities for
environmental mitigation plans that require additional water.
Based on the initial SVWMA Statement of Policy Principles, a
document published on December 14, 2001, the Company was
concerned with potential effects of prospective implementation
of the SVWMA. Therefore, the Company participated actively in
review of the Principles and the process for drafting specific
implementation agreements thereunder. Many of the Companys
concerns with the SVWMA have been addressed in the course of
further negotiations. The Company now believes that successful
implementation of the SVWMA could enhance the value of senior
water rights and clarify ownership issues necessary to permit
efficient transfers between willing sellers and willing buyers.
Because the implementation agreements are still in the process
of negotiation, the actual impacts of the SVWMA cannot be
accurately predicted. Uncertainty related to those negotiations
have caused certain upstream senior water rights holders,
including clients and partners of the Company, to defer new
water transfer transactions until the details of the SVWMA are
set. Thus, even though the long-term implications of successful
negotiation of the SVWMA are positive for water transfers in
California, the pending negotiations have deferred or canceled
transfers that might otherwise have been completed, including
transactions in which the Company intended to participate.



| |         
| | --------
| | Colorado

Douglas County, Colorado, south of Denver, is
experiencing very rapid population growth. The County also has
very limited local surface water supplies, and is reliant upon
groundwater and some surface water from local streams and the
South Platte River. Additional surface water for the area is not
readily available, as existing supplies are already controlled
by others and development of new water supply projects has been
blocked. Local agencies are pursuing new surface water imports
as well as further developing the sustainable use of local
groundwater to meet new demands on their systems. Demand for
water to supply new growth is expected to exceed
50,000 acre-feet over the next 20 years. Currently,
there are at least three regional water retail agencies that are
undertaking long-term supply development projects including
substantial infrastructure projects involving new pipelines,
diversion structures and off-stream reservoirs aimed at meeting
increasing water demands anticipated in the area. The Company is
attempting to induce these and other agencies to evaluate use of
the Companys local water resources to meet a portion of
such future demand.

Regulatory Overview



| |           
| | ----------
| | California

Water rights in California are subject to complex
laws, regulations and jurisdictions that complicate the
development of water for transfer and sale. Under the doctrine
of appropriation, a water user can publicly claim water from a
river for beneficial use, so long as the water is physically
available from the flow of the river after accounting for the
rights of prior appropriators. Thus, older appropriations are
senior in right to later appropriations. However, senior
appropriative rights may be lost through non-use for long
periods. Beginning in 1914, surface water (generally, water in
rivers) has been subject to regulation by the State Water
Resources Control Board (SWRCB). The SWRCB oversees
a registry of surface right appropriations and a dispute
resolution process designed to mediate competing claims to the
use of the States surface water. The Company

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claims various appropriative rights on the Yuba
River that were perfected by its predecessor in interest, some
of which predate SWRCB jurisdiction (pre-1914 rights) and should
therefore be grandfathered from regulatory
jurisdiction. However, recent developments, including the
SWRCBs decision in the Lower Yuba River water rights case
(currently on appeal), indicate that development of these rights
associated with the Yuba Property for transfer and use outside
the immediate area of Yuba County will take longer and cost more
than the Company had formerly anticipated.


California law also recognizes the rights of
landowners adjacent to a river to divert an unquantified amount
of water from the river for beneficial use on such lands
(riparian rights) or for in-stream beneficial use. Riparian
rights cannot be forfeited through non-use. Through its interest
in the water rights associated with the Yuba Property, the
Company claims riparian rights on the Yuba River; these riparian
claims are supported, as well, by a court decree dating from
1929.

Groundwater (generally, water in underground
aquifers) is not subject to statewide regulation. Overlying
landowners have the right to place wells on their property and
pump water from the underlying aquifer. In some cases, such
water rights may be severed from the land and traded separately.
The Company has retained the groundwater rights associated with
the Yuba Property. As noted above, however, the Sax Report
contemplates extending SWRCB jurisdiction to at least some of
the States groundwater. The extension and possible
perfection of SWRCB jurisdiction could further complicate
development of the Companys groundwater rights, so
development of such rights will take longer and cost more than
the Company formerly anticipated. In addition, recovery and
export of groundwater originating in Yuba County is subject to
extensive area of origin protections that the Company must
observe in realizing value from such rights. Accordingly, the
Company does not currently anticipate that it will derive
significant revenues from its water rights associated with the
Yuba Property during the current fiscal year.

When there are disputes about groundwater rights,
generally as the result of overdrawing a water basin by multiple
wells, such disputes are either negotiated to resolution among
the surrounding pumpers or submitted to litigation. In Southern
California, there are several basins in which such litigation
has resulted in a legal apportionment of the annual safe yield
of the basin among the historic pumpers. Such so-called
adjudicated basins are regulated by a court-appointed
watermaster who manages an accounting system to
assure that extractions from the basins are limited in
accordance with the courts order. During the fiscal year
ended March 31, 2001, important aspects of groundwater law
were clarified by the California Supreme Court in the Mojave
decision. However, the Supreme Court remanded the case to the
lower court for further proceedings which have not yet been
concluded. As a result, the ultimate value of the Companys
water rights in the Mojave Basin has been uncertain. Therefore,
the Company has leased production under its water rights under
short-term leases with local municipal water purveyors.

The proposed transfer of water from a place of
origin to a proposed area of use in another region of the State
generally requires a series of regulatory approvals designed to
assure that other water users and the environment are not harmed
by the transfer. For example, the Company had sought
clarification of the rules for such transfers in the context of
a series of petitions before the SWRCB. Under these petitions,
several of the Companys clients sought permission to
transfer to the Company water to which they have independent
rights to appropriate from the Sacramento River. Such water has
been made available for transfer through various conservation
activities undertaken by the petitioners. Following approval of
such petitions, the Company successfully managed to convey and
resell such water to unaffiliated water retailers in the Bay
Area and Southern California during the fiscal year ended
March 31, 2001, although conveyance and regulatory costs
prevented the Company from making a profit on such sales.
However, during the fiscal year ended March 31, 2002,
regulatory obstacles and the high cost of energy during the
electricity crisis precluded the Company from successfully
transferring similarly conserved water to the same clients. In
order to preserve the water for later use, the Company
negotiated water storage agreements with the United States
Bureau of Reclamation (USBR). Thus, a portion of the
water conserved during the 2001 agricultural season has been
reserved in storage and, subject to certain conditions that have
not yet been fully satisfied, the conserved/ stored water
remains available for future sale. Nonetheless, the Company
believes that the successful completion of small-scale transfers
(or a consistent pattern of refusal by public conveyance
operators to accommodate such transfers) will ultimately open
the way for more significant and more profitable sales in the

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future. In addition, the difficult and
time-consuming process required to complete such transfers
between willing sellers and willing buyers underscores the need
for reform of the regulatory regime.


In order to transport water from area of origin
(where the water may be surplus to local needs) to distant areas
of use, federal, state and local governments have developed a
complex interconnected infrastructure system to augment
conveyance through natural flow in rivers. Important portions of
the infrastructure include: (i) the Central Valley Project,
operated by USBR, (ii) the State Water Project (sometimes
referred to as the California Aqueduct), operated by the
California Department of Water Resources (DWR),
(iii) the Colorado River Aqueduct, operated by the
Metropolitan Water District of Southern California
(MWD), and (iv) the Los Angeles Aqueduct,
operated by the Los Angeles Department of Water and Power. In
addition, there are a variety of regional and local conveyance
facilities throughout the State.

Under legislation enacted in 1986 (the
Wheeling Statute), available capacity in such public water
systems is required to be made available to facilitate voluntary
water transfers, subject to fair compensation to the
owner of the infrastructure. In light of uncertainty regarding
application of the Wheeling Statute and the reluctance of system
operators to accommodate water transfers, the Company has sought
clarification through request, negotiation and further
legislation. The outcome of the Companys efforts to gain
such clarification continues to be uncertain. Therefore, even as
to water rights owned by the Company and eligible for transfer
according to applicable water rights law, there can be no
assurance that the Company will gain access to available
conveyance capacity on a timely basis or at an economic cost.
Without such access, the Companys ability to sell water
has been and will continue to be severely constrained, and the
Company may be unable to monetize the value of many of its
California water assets. The results of the Companys
efforts over the last four years to gain such clarification have
been unsatisfactory, and the Company anticipates that obtaining
clarification of these issues may take several more years.

The most difficult aspect of arranging for the
transfer and sale of water from Northern California to Southern
California involves negotiation of conveyance through
publicly-owned facilities controlled by DWR and/or by USBR. The
Company believes that conveyance agreements are particularly
difficult to negotiate because DWR and USBR face internal
conflicts between their roles as regulators and their roles as
facility operators and water rights holders. For example,
conserved water that is refused conveyance capacity often flows
to DWR and/or USBR for their own appropriation and sale to
south-of-Delta contractors. Like monopoly service providers in
other utilities, these agencies have resisted providing access
to otherwise idle capacity in their systems, except at unit
costs that are too high to allow economic water transfers. Thus,
there can be no assurance that these issues will be resolved in
a manner that will enable the Company to either profitably
develop a water transfer business in California, or to
profitably develop and manage its California water assets.

Colorado

The regulatory environment in Colorado is
substantially more transparent, less costly and more predictable
in terms of outcome than in California. The Company believes the
Colorado system is more conducive to water asset development and
protection and more hospitable to water sales than
Californias system. First, water rights matters are
adjudicated by a state-wide system of Water Courts presided over
by judges with specialized subject matter knowledge from which
appeal may be taken directly to the Colorado Supreme Court. The
Water Courts retain jurisdiction over cases, so that changes of
facts or circumstances can be submitted to further adjudication
without re-trying complicated issues determined in prior phases
of the case. Second, the Colorado State Engineers Office
and regional Water Commissioners are independent and
disinterested regulators who oversee compliance with
well-developed and integrated precepts of water use
administration without conflict based on direct competition for
water. Water rights are described as being tributary
(generally similar to surface water in California)
or nontributary (generally similar to groundwater in
confined aquifers in California). The Company has Water
Court-recognized rights to a minimum of 6,475 acre-feet of
annual production of nontributary water, plus additional rights
to tributary appropriations from Cherry Creek, as well as a Plan
for Augmentation to operate the separate sources on a
conjunctive basis that increases overall flexibility,
reliability and value.

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Description of Business

The Companys business goal has been to
create recurring income through identifying undervalued and/or
under used water assets, and enhancing the value of those assets
via development, transmission and delivery to customers in the
arid regions of California and Colorado. However, significant
delays in the Companys attempts to overcome regulatory
obstacles to economic water transfers in California have forced
it to reconsider its business plans. As a result, during the two
most recent fiscal years, the Company has sold some of its
non-strategic assets in accordance with a plan to manage the
Companys liquidity position and to reduce its operating
expenses. The Company also re-evaluated its plans to develop its
existing water assets in light of current regulatory obstacles
and financial constraints. As a result, the Company sold or
disposed of certain of its assets that it no longer believed it
would be able to profitably develop, manage and/or monetize
within a reasonable period. The following non-strategic assets
were sold or disposed of during the two most recent fiscal years:

Fiscal Year ended March 31, 2002:

|                                  |  |            |       | 
|--------------------------------- |  | ---------- | ----- | 
|Asset                             |  | Gain(Loss)
|                                  |  |           
|Glenn County, California Farmland |  | $          | 1,000 | 

Fiscal Year ended March 31, 2001:

|                                         |  |            |          |  
|---------------------------------------- |  | ---------- | -------- | -
|Asset                                    |  | Gain(Loss)
|                                         |  |           
|Central Basin (Los Angeles) Water Rights |  | $          | 428,000  |  
|Mojave Water Rights (Partial Sale)       |  | $          | 465,000  |  
|Olancha Project                          |  | $          | (763,000 | )
|Cucamonga Water Fee Agreement            |  | $          | 879,000  |  

The disposal of the Olancha Project during the
year ended March 31, 2001 also resulted in an extraordinary
gain on forgiveness of debt totaling $769,000.

In addition, as a part of the aforementioned plan
to sell non-strategic assets in order to manage liquidity and
reduce operating expenses, the Company plans to sell the
following assets during the fiscal year ending March 31,
2003:

|                                        |  |                |           | 
|--------------------------------------- |  | -------------- | --------- | 
|Asset                                   |  | Carrying Value
|                                        |  |               
|Mojave Water Rights                     |  | $              | 1,668,000 | 
|Mojave Land                             |  | $              | 553,000   | 
|Bear Valley Mutual Water Company shares |  | $              | 642,000   | 

These assets are expected to be sold within one
year. Accordingly, they have been reclassified in the
Companys financial statements that are included in this
Annual Report as assets held for sale as of March 31, 2002.

California
Water Transfer Program

Prior to the fiscal year ended March 31,
2001, the Companys business plan had assumed that water
transfer transactions would require the Company to
(i) purchase water supplies that could be delivered to
urban areas in California, (ii) finance the development or
use of infrastructure, such as wells, pipes, pumps and viaducts
needed to deliver water, and (iii) enter into agreements
with utilities, cities, or water districts for the sale or lease
of the Companys developed water supplies to such water
retailers. The Company had anticipated that each water transfer
transaction that it entered into would be unique and that the
terms under which such transactions were financed and completed
would vary. All such transfer transactions would be expected to
involve significant government regulation and would be dependent
upon the Companys ability to obtain all required
governmental approvals and to satisfy a series of environmental
and other protective

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conditions. In accordance with its prior business
plan, the Company entered into the following water transactions
in California:




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) In September 1997, the Company entered
    into a water purchase agreement with San Bernardino Valley
    Municipal Water District (SBVMWD) pursuant to which SBVMWD
    agreed to sell to the Company 100,000 acre-feet of surplus
    California State Water Project water during the ensuing ten
    years. However, public agencies resisted the Companys
    attempt to compete with their water delivery operations, and in
    September, 1997, MWD filed a complaint in the Superior Court of
    California for the County of Los Angeles in order to block the
    water sale. A separate, but similar action was filed by DWR in
    the California Superior Court for the County of Sacramento
    against SBVMWD and the Company in December, 1997. As a result of
    these legal challenges, the Company has not been able to deliver
    water under its agreements with the Santa Margarita Water
    District (SMWD).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (b) On September 30, 1998, the Company
    entered into a pumping rights lease and a water sale agreement
    with the City of Inglewood, California. Beginning
    October 1, 1998, Inglewood leased the rights to pump 4,450
    acre-feet of water per year to the Company for a five-year
    period. In consideration of the lease, the Company made a
    $3,603,200 lump-sum cash payment to Inglewood. Under the water
    sale agreement, the Company agreed to sell, and Inglewood agreed
    to buy, 5,950 acre-feet of water each year for the next five
    years. In the first year, Inglewood paid the Company $200 per
    acre-foot ($1,190,000). After the first year, the per acre-foot
    price escalates over the remaining four-year period at a rate
    equal to the sum of 3.75% per year plus 25% of any increase in
    MWDs rate for water, as defined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The Company financed the pumping rights lease
    lump-sum payment through a $3,560,000 five-year amortizing term
    loan to a wholly-owned subsidiary of the Company. The loan is
    secured by the Companys rights under the pumping rights
    lease with Inglewood in addition to the water rights associated
    with the other 1,500 acre-feet of water to be sold to Inglewood
    by the Company annually during the term of the loan. The loan is
    also guaranteed by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The Company obtained 4,450 acre-feet of the 5,950
    acre-feet of water required by Inglewood annually from the lease
    it entered into with Inglewood. The Company secured the balance
    of the water from its owned inventory of West Basin groundwater
    pumping rights (242 acre-feet per year) and entered into two
    water rights leases. The first is a five-year water rights lease
    for 1,008 acre-feet per year at a price of $150 per acre-foot in
    the first year ($151,200). This price will escalate over the
    remaining four-year period at $7.50 per acre-foot per year. The
    second is a fifteen-year water rights lease for 250 acre-feet
    per year for a price of $135 per acre-foot in the first year
    ($33,750). The costs for subsequent years will be determined by
    multiplying the cost for the first year by the ratio of the
    index price for each subsequent year divided by the index price
    for the first year. The index price is based on prices
    established annually by MWD.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (c) In December 1998, the Company completed
    a pilot water sale in cooperation with MWD. For the first time
    in its 70-year history, MWD exchanged water with a private
    company for delivery within MWDs service territory. In
    this transaction, the Company sold 1,000 acre-feet of water to
    SMWD. The transaction involved water previously purchased by the
    Company in Central California. The water was exchanged into the
    State Water Project, where it was then conveyed to MWD by DWR.
    MWD stored, treated and delivered the water to the Municipal
    Water District of Orange County, and ultimately to SMWD. The
    transaction was not financially material or profitable for the
    Company. However, pursuant to the precedent set by the pilot
    transfer, the Company arranged a similar transaction with SMWD
    and, on July 16, 1999, applied to MWD for facilitation of
    the transfer under the same conditions and pursuant to the same
    statutory authority as the 1998 transfer. During the fiscal year
    ended March 31, 2001, the Company completed negotiations
    with MWD and completed the transfer of water to SMWD. However,
    because of conveyance costs, energy costs, and system access
    limitations imposed by MWD, only a portion of the water
    delivered to MWD was actually made available to SMWD. As a
    result, the overall transaction was not profitable for the
    Company.
|
| | (d) The Company purchased real estate and
    water rights and aggregated the associated water rights to
    extract 2,996 acre-feet of water per year from the Mojave Basin
    in San Bernardino County, California.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Following the sale during the fiscal year ended
    March 31, 2001 of 1,000 acre-feet of its water rights in
    the Mojave Basin, the Company retains the rights to extract
    1,996 acre-feet of water per year. Beginning in the fiscal year
    ended March 31, 2000, the Company began leasing such rights
    for one-year periods, earning $106,755, $81,830 and $131,755 in
    the fiscal years ended March 31, 2000, 2001 and 2002,
    respectively. The Company has allocated 30 acre-feet to its land
    held for sale in the Mojave Basin, and is in the process of
    marketing the remaining 1,966 acre-feet as part of the
    aforementioned plans for selling non-strategic assets in order
    to manage the Companys liquidity position and reduce its
    operating costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (e) In prior fiscal years, the Company had
    invested $1,274,678 in the development of a water project in
    Inyo County, California, which included the purchase of 240
    acres of land for a cost of $1,005,000. Because of uncertainty
    in the process for gaining environmental and other regulatory
    approvals for the project, the Company recorded an allowance
    against the core Inyo County water project costs of $1,274,678
    incurred as of March 31, 2000 (see Item 7.
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations). During the fiscal year ended
    March 31, 2001, after attempting to sell the project, the
    Company decided to abandon further development activity which
    resulted in an impairment of the remaining assets of this
    project of $762,770, and reached an agreement to return the land
    to its former owner in consideration of cancellation of the
    outstanding balance of the purchase money note secured by such
    property. Cancellation of the note resulted in an extraordinary
    gain on the early extinguishment of debt of $758,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (f) In February 1999, the Company entered
    into a water transfer agreement with Natomas Central Mutual
    Water Company (Natomas) pursuant to which Natomas
    agreed, subject to certain conditions which were never fully
    satisfied, to transfer to the Company up to 30,000 acre-feet of
    non-Central Valley Project water from the Sacramento River. In
    February 1999, the Company paid a nonrefundable deposit of
    $275,000 to Natomas as an advance against its obligation to pay
    Natomas, upon delivery of the water to a third-party purchaser,
    $20 per acre-foot for any of the water transferred for use
    within or north of the Delta and $50 per acre-foot for any of
    the water transferred for use south of the Delta. In addition,
    the Company also agreed pay Natomas 50% of the net proceeds, as
    defined, from the sale of water to a third-party purchaser. In
    July 1999, the Company entered into a contract for the sale of a
    portion of this water to a customer within the service area of
    the MWD. The Company thereupon made a request to MWD to convey
    the water to the customer. In April 1999, Natomas and the
    Company jointly filed a petition with the State Water Resources
    Control Board (SWRCB) seeking authority to complete
    this transfer. On December 28, 1999, the SWRCB entered its
    Order WR 99-012, which significantly limited the amount of
    water available for transfer based on Natomass
    conservation efforts. During the fiscal year ended
    March 31, 2001, the Company completed a transfer of water
    originating with Natomass conservation efforts to SMWD.
    However, because of conveyance costs, energy costs, and system
    access limitations imposed by MWD, only a portion of the water
    delivered to MWD was actually made available to SMWD. As a
    result, the overall transaction was not profitable for the
    Company.
|
| | (g) In May 1999, the Company also entered
    into a water transfer agreement with the Sutter Mutual Water
    Company (Sutter) that is similar to the arrangement
    with Natomas, and made a deposit of $100,000 for water to be
    delivered under that contract. As a result of the regulatory and
    other difficulties that the Company encountered with the Natomas
    transfer and other water projects, the Company also provided an
    allowance for water project costs equal to 100% for its deposit
    for this contract. During the fiscal year ended March 31,
    2001, however, the Company successfully completed a transfer of
    a portion of Sutters conserved water to the Contra Costa
    Water District, a Bay Area wholesale agency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (h) In March, 2000, the Company also entered
    into a conserved water purchase and sale agreement with
    Reclamation District (RD) 108, a Northern
    California agricultural water agency. Pursuant to that agreement
    and under terms of a petition approved by the SWRCB, the Company
    successfully transferred conserved water to Contra Costa Water
    District. Neither the Sutter nor the RD 108 transfer
    involved a significant amount of water, and the financial
    results for the Company were not material. However, the Company
    believes that the precedents set in these transfers provide
    opportunities for future transfers that are more significant in
    size and revenue potential.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) The Company also entered into a one-year
    option agreement with Contra Costa Water District for the future
    delivery of water. The option to purchase 8,000 acre-feet of
    water expired unexercised on March 5, 2001, and the Company
    recorded the option price of $32,000 as income in the quarter
    ended March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (j) Because of uncertainty over its ability
    to generate revenue from water transfers based on regulatory
    impediments, the Company has reduced its emphasis on acquiring
    its own portfolio of water assets. The Company believes that
    direct ownership of water assets  though valuable in the
    long run  subjects the Company to significant risk that
    such assets can be indefinitely stranded through
    delay or adverse or just deferred governmental actions. The
    negative cost of carrying such assets during an extended and
    uncertain period before water arising under such assets can be
    profitably marketed is uneconomic. In response, the Company has
    attempted to develop water supply partnerships in which the
    Company assumes certain regulatory and management risks
    associated with transferring water arising under its
    partners water rights in exchange for a portion of the
    resulting value accretion made possible through sale and
    transfer of the water. This strategy is designed not only to
    produce interim cash flow from the success of specific transfers
    of temporarily surplus water arising under the water rights of
    the Companys partners but also to enhance the value of the
    Companys own assets by overcoming regulatory obstacles and
    opening accessible markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (k) The Companys ability to derive
    revenue from its own water assets depends, in part, on the
    outcome of regulatory and administrative impediments in its
    California operations. The Companys ability to derive
    profits from the sale of water it does not currently own depends
    on its ability to acquire such water, make sales to customers,
    and arrange delivery, all on an economic basis. Consummation of
    profitable water sales is subject to a variety of restrictions
    designed to protect third-party water users and the environment.
    The Company believed that it could operate profitably within
    these restrictions. However, public agencies which control
    critical segments of the public infrastructure necessary to
    transport and deliver water in California, the Companys
    principal area of operation at the current time, have restricted
    access to such facilities through pricing and administrative
    action. The Company believes that many of these latter
    restrictions violate the Wheeling Statute (Section 1810 of
    the California Water Code). Therefore, and in order to permit it
    to complete profitable water sales, the Company has undertaken a
    variety of administrative, legal, regulatory and legislative
    initiatives to identify and remove such artificial barriers to
    voluntary water transfers. There can, of course, be no assurance
    that the Companys initiatives will result in removal of
    such artificial barriers to voluntary water transfers in
    California or, if they are removed, when that might happen.
    During Fiscal 2002, those barriers, coupled with the spike in
    electric prices in California, prevented completion of any new
    water transfer transactions. Given its current financial
    position, the Company cannot continue to pursue profitable water
    transfers indefinitely.

California 
Yuba Property Water Rights

The Company owns certain riparian and
appropriative rights, together with certain groundwater rights,
associated with approximately 9,055 acres of real property that
constitutes the Yuba Property. The Yuba County Superior Court,
in a 1929 judgment, recognized the Companys
predecessor-in-interests riparian rights to the Yuba River
and pre-1914 appropriative rights. (Appropriations that began
before December 19, 1914 do not require a permit for
transfer or change in place or purpose of use from the State
Water Resources Control Board.) Additionally, the Company holds
overlying rights to the groundwater aquifer beneath the Yuba
property.

The Company is currently considering developing
its Yuba Property water for sale or lease. The Companys
Yuba Property water resources, if and when properly developed,
could be distributed with the other water resources originating
in the Sacramento River Valley. The Sacramento River Valley
water resources serve most of Northern California and serve
Southern California through statewide water distribution
facilities which begin at the southern end of the Delta.
Accordingly, because of the configuration of Californias
water distribution system, the Company believes that sales could
be made by the Company to water utilities serving most of the
States population. The Company has not, however, developed
a plan for

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marketing and selling its Yuba Property water,
and the Company cannot currently estimate when any water
disposition plan will be implemented. In addition, there are
various regulatory hurdles that could delay or limit the
Companys ability to deliver or sell its Yuba Property
water. As a result of various legal and engineering
investigations undertaken by the Company, and because of the
outcome of the SWRCBs Lower Yuba River water rights
hearing process (now on appeal), the Company believes that
development and delivery of water from the Yuba Property will
take longer and cost more than it had formerly anticipated. The
Companys carrying value of these assets is zero, and
accordingly, the delays and uncertainties surrounding the
Companys efforts to monetize these assets do not entail an
impairment charge against the value of the assets.


Other Water Assets

The Company owns 1,996 acre-feet per year of
groundwater production rights in the Mojave Basin in San
Bernardino County, California. In its August 2000 Mojave
decision (City of Barstow v. City of Adelanto et al.),
the California Supreme Court ordered further proceedings in the
trial court to implement its clarification of issues in the
adjudication that were raised on appeal. During the fiscal year
ended March 31, 2002, the further proceedings involved
consideration of a variety of strategies for implementing the
Mojave decision as well as negotiations among the parties to the
adjudication related to possible implementation strategies.
Although the primary parties to those negotiations have
indicated that they have reached a settlement, the terms of the
purported settlement have not yet been drafted for circulation.
The Company believes, based on reports of the terms of the
proposed settlement, that the basis on which the Mojave decision
will be implemented will be favorable for the value of its water
rights and will preserve the benefits of transfers among Mojave
Basin water users. However, the complexity of the adjudication
and settlement preclude accurate assessment of the impacts of
the adjudication until the settlement is released for review. In
any case, the Company has decided to sell its remaining Mojave
Basin water rights at such times as the value of those water
rights can be ascertained in light of the ultimate settlement,
which is expected to be available for review in the second
quarter of Fiscal 2003. In the interim, the Company has entered
into a series of short-term leases of the water arising under
its Mojave Basin water rights. The Company sold 1,000 acre-feet
of its Mojave Basin water rights during the fiscal year ended
March 31, 2001 at a price slightly in excess of $1,300 per
acre-foot. In light of the apparent settlement implementing the
Mojave decision, the Company anticipates that participants in
the Mojave adjudication will recognize increased value in Mojave
Basin water rights, including the water rights the Company
intends to offer for sale.

The Company owns shares of the Bear Valley Mutual
Water Company, an entity that owns water and water rights. Under
the aforementioned plan to sell non-strategic assets, the
Company intends to sell its BVMWC interests.

In light of the Companys decision to
dispose of its Mojave Basin water rights and its BVMWC shares,
these assets have been classified as assets held for sale as of
March 31, 2002.

Colorado 
Cherry Creek Water Rights Project

In July 1992, the Company initiated a project
(the Cherry Creek Project) to assemble, develop, and
eventually sell water or packaged water rights to municipalities
and other water users located in Colorados Cherry Creek
basin. Cherry Creek is a tributary of the South Platte River,
and the Cherry Creek basin is the drainage area of Cherry Creek,
encompassing approximately 60 square miles. Much of the
Cherry Creek basin is part of the greater metropolitan area of
Denver, an area that historically has had water shortages.
Although the water supplies currently available in the Cherry
Creek basin are sufficient, in most cases, to meet the current
demand for water in the area, increased need for water as a
result of projected residential, commercial, and industrial
development and growth in the Cherry Creek basin is expected to
exceed the currently available supply of water in the region
within the next several years. The goal of the Cherry Creek
Project is to develop the Companys water rights to provide
reliable additional water resources in the Cherry Creek basin
that can be sold or leased to municipalities and other water
users to meet expected future demand for water.

The State of Colorado has enacted various laws
and regulations that identify and establish rights to tributary
water which grant the holders thereof the right to use specified
amounts of tributary water on a fixed

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priority basis. Because junior water rights do
not constitute a reliable source of water and because of the
scarcity of tributary resources in the area, municipalities and
water districts in the Cherry Creek basin have relied on
supplemental groundwater resources and other nontributary
supplies. However, under Colorado law, by combining various
water rights under a court-approved plan for augmentation,
junior water rights can effectively be used out of
priority without injury to the senior appropriators.
Because court-approved plans for augmentation allow water to be
diverted from junior tributary water sources without regard to
the priority system, such plans are currently the most common
method by which new reliable water supplies are developed for
municipal uses in Colorado. As a result, the Company believes
that water derived from the Cherry Creek Project constitutes a
reliable future supply to meet the growing demand within the
area.


At the beginning of its Cherry Creek Project in
1992, the Company acquired a total of approximately 4,559 acres
of undeveloped land (primarily for the water rights associated
with the land) and the right to drill and service water wells on
land that was not acquired by the Company. To date, the Company
has sold or exchanged a total of 4,279 acres of the Cherry Creek
Project properties. In the year ended March 31, 2000,
however, the Company repurchased 128 acres, which it had
previously sold because the Company determined that the
repurchased property is important to the full development of the
Cherry Creek Project. During the Companys most recent
fiscal year, the Parker Water & Sanitation District
(PW&SD), a special purpose water agency in
Douglas County, initiated a condemnation action for 36 acres of
that 128-acre parcel for use in connection with its own proposed
new water supply program. The Company defended the property
against this proposed taking. Following the close of the most
recent fiscal year, the Company settled issues related to
possession of the disputed property by PW&SD for a
combination of a cash deposit (as against an ultimate
determination of the value of the 36 acres) and
preservation of rights and easements necessary to complete
development of the Cherry Creek Project. The cash deposit in the
amount of $294,000 has been disbursed by the Court to the
Company. The Company expects further judicial proceedings to
require PW&SD to make certain additional payments to the
Company to reflect the actual value of the condemned property
and to reimburse the Company for certain costs of defending its
property rights; however, the outcome of such judicial
proceedings is inherently unpredictable, and the Company cannot
predict the timing or results of those future proceedings. In
connection with the condemnation action, the Company has
commissioned various analyses and appraisals of portions of the
Cherry Creek Project implicated in that dispute. As a result of
the current status of the condemnation litigation and in light
of the third-party estimates of value, the Company has
determined that the Cherry Creek Project assets are properly
valued on the Companys books.

The Company has retained substantially all of the
water rights associated with the land it has resold (including
the right to drill and service a number of wells on such resold
land). The real estate parcels that have been sold are not
needed to further the principal purposes of the Cherry Creek
Project. The Company has the right to operate 14 wells
drawing tributary water in the Cherry Creek alluvium, of which
12 are existing wells. Ten of the 14 well rights (including
two completed alluvial wells on property recently acquired by
PW&SD under threat of condemnation) are located on property
that is not owned by the Company. With respect to these ten
wells, the Company owns the right to drill and operate the wells
and to enter the real property on which such wells may be
located or drilled in order to operate, maintain or establish
such wells.

In addition to the outright sales of Cherry Creek
Project land, the Company, in April 1995, transferred
approximately 257 acres of the Companys Cherry Creek
Project real estate to the State of Colorado for annexation into
the Castlewood Canyon State Park in exchange for the rights to
withdraw and use 1,290 acre-feet of nontributary water per year
associated with the adjacent park land owned by the State.

The Company currently has the right to sell or
lease each of the various water rights it owns. However, in
order to package its water rights so that it can sell long-term,
reliable water resources to municipalities and other larger
water users located in the Cherry Creek basin, the Company
combined its various water resources in a plan for augmentation
approved by the Colorado District Court, Water Division (the
Colorado Water Court) in February 1998. During the
fourth quarter of the year ended March 31, 1999, the
Company drilled its first nontributary well to begin
implementation of the plan for augmentation. This well provides
the Company with additional information on the water resources
in the aquifer. In addition, water from this well is available
for future water sales. Subsequent to the close of the fiscal
year on March 31, 2002, the Company produced and sold its
first water from this nontributary source. Although the amount
and value of this water

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sale are not material, the Company believes that
completion of construction, permitting, sale and successful
delivery of Cherry Creek Project water are important milestones
in development of the Cherry Creek Project.


With the Plan for Augmentation approved and
implementation begun, the Company is currently seeking to market
its water in the Cherry Creek basin. The Company is considering
a number of alternatives, from sale of water to a single buyer
or user, to the short-term and/or long-term sale of water to
municipalities or other water users. The sale of its water will,
however, require the Company or the purchaser to develop and
build the infrastructure necessary to utilize the water
collected within the Cherry Creek Project. Capital expenditures
necessary to produce and deliver all of the water available to
the Cherry Creek Project are expected to be significant;
however, the Company expects that such expenditures can be
phased to coincide with increased demand for water in the area
and sales of water from the Cherry Creek Project.

During the fiscal year ended March 31, 2001,
the Company initiated or continued discussions with several
local water agencies aimed at determining a basis on which the
Cherry Creek Project could be integrated into the long-term
water resource planning in the area. In the fiscal year ended
March 31, 2002, the Company began marketing Water
Contract Delivery Units (WCDUs) as contract
rights to an undivided portion of the water production capacity
of the Cherry Creek Project. In support of the marketing effort,
the Company formed a wholly-owned subsidiary in Colorado named
the Cherry Creek Water Company for the purpose of developing the
Cherry Creek Project within a Colorado-based corporate entity.
Subsequent to the end of the most recent fiscal year, several
local water agencies have expressed the non-binding intent to
purchase WCDUs to meet a portion of their future water
requirements. The Company intends to contribute the assets
associated with the Cherry Creek Project to the Cherry Creek
Water Company, subject to the approval of the transaction by the
shareholders of the Company. Subsequent to such action, the
Cherry Creek Water Company will be operated as a wholly-owned
subsidiary of the Company and will continue to market WCDUs and
complete the phased development of the Cherry Creek Project to
meet local water demand as it develops. The Company has not yet
completed the sale of any WCDUs, and, as a result, there can be
no assurance that the Company will, in fact, sell WCDUs on terms
that are satisfactory to the Company.

Environmental Regulation

The Companys operations are or may become
subject to federal, state and local laws and rules regulating
the discharge of materials into the environment, air quality
standards, pollution of stream and freshwater sources, odor,
noise, dust and other environmental protection controls. The
Company believes that it currently is in substantial compliance
with all material environmental laws governing its operations.
Furthermore, the Company does not believe that federal or state
environmental laws will hinder or adversely affect its proposed
operations. Compliance with existing environmental laws may have
the effect of delaying the completion of projects in those cases
where environmental impact statements or other similar documents
have to be prepared and filed. Furthermore, future legislation
designed to protect the environment, as well as future
interpretations of existing laws, could require further
expenditures by the Company, or have adverse effects on its
operations, the extent and nature of which cannot now be
predicted. Water leased or sold by the Company may be subject to
regulation as to quality by the United States Environmental
Protection Agency (the EPA) acting pursuant to the
Federal Safe Drinking Water Act (the US Act).
In California, the responsibility for enforcing the US Act
is delegated to the California Department of Health Services
(the Health Department) and to the SWRCB acting
pursuant to the California Safe Drinking Water Act (the
Cal Act). The US Act provides for the establishment
of uniform minimum national water quality standards, as well as
governmental authority to specify the type of treatment
processes to be used for public drinking water. Moreover, the
EPA has an ongoing directive to issue regulations under the
US Act and to require disinfection of drinking water,
specification of maximum contaminant levels (MCLS)
and filtration of surface water supplies. The Cal Act and the
mandate of the Health Department are similar to the US Act
and the mandate of the EPA, and in many instances MCLS and other
requirements of the Health Department are more restrictive than
those promulgated by the EPA.

Both the EPA and the Health Department have
promulgated regulations and other pronouncements, which require
various testing and sampling of water and inspections by
distributors and retailers and which set MCLS for numerous
contaminants. Since the Company does not intend to sell water
directly to consumers, it

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believes that these standards only affect the
water agencies that may buy or lease the Companys water.
While drinking water regulations do not directly affect the
Company, the regulations regarding the quality of water
distributed affects the Companys intended customers and
may, therefore, depending on the quality of the Companys
water, impact the price and terms upon which the Company may in
the future sell its water or water rights.


Under various federal, state and local laws,
regulations and ordinances (collectively, Environmental
Laws), an owner or operator of real estate interests may
be liable for the costs of cleaning up, as well as certain
damages resulting from, past or present spills, disposals or
other releases of hazardous or toxic substances or wastes on, in
or from a property. Certain Environmental Laws including the
federal Comprehensive Environmental Response Compensation and
Liability Act and Resource Conservation and Recovery Act, impose
such liability without regard to whether the owner knew of, or
was responsible for, the presence of hazardous or toxic
substances or wastes at or from the property. The presence of
such substances or wastes, or the failure to properly remediate
any resulting contamination, also may adversely affect the
owners or operators ability to sell, lease, or
operate its property or to borrow using its property as
collateral. Although the Company is not aware of any such
environmental contamination on any of its real estate holdings
or on any locations adjacent to its holdings, there can be no
assurance that such environmental contamination does not exist.



| |          
| | ---------
| | Employees

As of the date of this report, the Company has
eleven employees, none of whom is covered by any collective
bargaining agreement.






|        |           
|------- | ----------
|Item 2. | Properties

The principal properties currently owned by the
Company are the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Undeveloped land in the Cherry Creek basin,
    Colorado, consisting of a total of approximately 408 acres
    (less the 36 acres to which PW&SD recently gained
    immediate possession in a settlement of the partial condemnation
    of the Companys Vessel Parcel), and associated water
    rights. See Item 1. Business  Description
    of Business  Cherry Creek Project. The
    Companys Cherry Creek land is zoned for agricultural and
    residential uses or for use by special permit for a water
    project.  
|
| |  | Various rice farms and ranches, located in Yuba
    County, California, that collectively comprise 1,424 acres,
    together with the water rights associated with such land. The
    rice farms are graded for cultivation and watered by wells on
    the properties. The Company leases the rice farms and ranches to
    unaffiliated operators.                                                                                                                                                                                   
|
| |  | The Company owns 30 acres of real estate
    located on the Yuba Property, in Yuba County, California,
    approximately ten miles northeast of Marysville, California. The
    30 acres are zoned industrial-extractive and may be used
    for commercial but not residential purposes. However, the
    Company has adjudicated title to the water rights associated
    with approximately 9,025 acres of adjacent land that is owned by
    an unaffiliated third party. The Company maintains a project
    office on the parcel.
|
| |  | Certain mineral interests and other property
    rights, including hydrocarbon, oil, gas and entry rights,
    related to 440 acres of real estate in Chico, California, and to
    2,578 acres near Sacramento, California.                                                                                                                                                                                                                                                                                                           
|
| |  | Various cattle and crop farms with four
    associated residences, located in San Bernardino County, that
    collectively comprise 247 acres.                                                                                                                                                                                                                                                                                                                                                                                         

Some of the Companys foregoing real estate
properties are encumbered by mortgages. For a description of the
Companys mortgage indebtedness, see Note 10:
Long-Term Debt to the Companys consolidated
financial statements included as part of this Annual Report on
Form 10-K.

The Company leases its principal executive office
at 102 Washington Avenue in Point Richmond, California,
containing 2,400 net square feet, pursuant to a lease that
expires in February 2003. The Companys current monthly
rental obligation for the facility is $3,950. On March 3,
2002 the Companys offices were

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damaged by a fire that spread from an adjacent
building. As a result, the Company temporarily relocated its
headquarters to a near-by building. Repairs to its headquarters
are underway, and the Company expects to re-occupy its offices
early in the second quarter of the current fiscal year and to
extend its lease beyond the current expiration date. The Company
believes that substantially all of its losses associated with
the fire are covered by insurance.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is the general partner of Western
Agua, L.P. (Western Agua), a partnership that agreed
to provide consulting services to the Nevada Land and Resources
Company, LLC, an unaffiliated limited liability company (the
Nevada LLC), pursuant to a certain consulting
agreement. The Nevada LLC purported to terminate the Consulting
Agreement on March 13, 1998 based on Western Aguas
purported willful breach of the consulting agreement. On
November 10, 1998, Western Agua filed an action in the San
Diego Superior Court against the Nevada LLC for breach of
contract, specific performance and an accounting relating to the
Consulting Agreement. Western Aguas complaint sought a
judicial declaration that the consulting agreement was not
terminated and remains in full force and effect. The Nevada LLC
filed a cross complaint against Western Agua and the Company
containing claims for breach of contract, breach of fiduciary
duty, declaratory relief, compensatory damages in excess of
$100,000, an order enjoining cross-defendants from the
development, sale and/or management of sale of water in certain
areas, and a judicial declaration that cross-defendants have
breached the Consulting Agreement and that the Nevada LLC has
not.

Effective September 1, 1999 (the
Effective Date), the Company, Western Agua and
Nevada LLC entered into an agreement wherein they agreed that:
(i) the action would be dismissed without prejudice;
(2) from the Effective Date forward, the Company and
Western Agua were relieved of restrictions on certain
water-related business activities; (3) all claims,
counterclaims and defenses by Western Agua and the Company, on
the one hand, against Nevada LLC, on the other hand, and all
claims, counterclaims and defenses by Nevada LLC, on the one
hand, against Western Agua and/or the Company, on the other
hand, would be preserved without regard to the passage of time,
from the Effective Date through and including July 31,
2002; and (4) Nevada LLC would deliver notice to Western
Agua on or before June 30, 2002 of the amount of the
consulting fee, if any, which would be owed by Nevada LLC to
Western Agua if the consulting agreement were in effect as of
April 23, 2002.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters To A Vote of Security
    Holders

None.

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PART II




Item 5.     Market
For Registrants Common Equity and Related Stockholder
Matters

Until August 2000, the Companys common
stock was traded on the Nasdaq National Market under the symbol
WWTR. During the fiscal year ended March 31,
2001 the Company received notice from The Nasdaq Stock Market
that the Companys common stock was out of compliance with
two of the maintenance standards necessary for the common stock
to be traded on the Nasdaq National Market. Accordingly, the
Companys common stock was de-listed from trading on the
Nasdaq National Market, effective August 30, 2000. The
Companys common stock is currently traded electronically
on the OTC Bulletin Board under the symbol WWTR. The following
table sets forth for the prior two fiscal years the high and low
closing sales prices of the common stock.

|                                 |  |     |     |      |  |   |      | 
|-------------------------------- |  | --- | --- | ---- |  | - | ---- | 
|                                 |  | Low |     | High
|                                 |  |     |     |     
|YEAR-ENDED MARCH 31, 2002        |  |     |     |      |  |   |      | 
|First Quarter (April-June)       |  | $   | .20 |      |  | $ | 1.10 | 
|Second Quarter (July-September)  |  |     | .48 |      |  |   | .91  | 
|Third Quarter (October-December) |  |     | .36 |      |  |   | .59  | 
|Fourth Quarter (January-March)   |  |     | .22 |      |  |   | .89  | 
|                                
|YEAR-ENDED MARCH 31, 2001        |  |     |     |      |  |   |      | 
|First Quarter (April-June)       |  | $   | .19 |      |  | $ | 1.19 | 
|Second Quarter (July-September)  |  |     | .03 |      |  |   | .53  | 
|Third Quarter (October-December) |  |     | .06 |      |  |   | .28  | 
|Fourth Quarter (January-March)   |  |     | .16 |      |  |   | .31  | 

On March 31, 2002, the Company had 1,568
record holders of its common stock. The Company believes there
are numerous additional beneficial owners of the common stock
whose shares are held in street name.

To date, the Company has not declared or paid any
cash dividends with respect to its common stock, and the current
policy of the Board of Directors is to retain earnings, if any,
to provide for the expenses of the Company. Consequently, no
cash dividends are expected to be paid on the common stock in
the foreseeable future. Further, there can be no assurance that
the proposed operations of the Company will generate the
revenues and cash flow needed to declare a cash dividend or that
the Company will have legally available funds to pay dividends.
Any dividends on the Common Stock would be subject to prior
payment of dividends on the Companys currently outstanding
Series C Preferred Stock and Series F Preferred Stock.

As of March 31, 2002 and 2001, there were
outstanding 2,121.8 and 2,000 shares of the Companys
Series F Convertible Redeemable Preferred Stock. The
Series F Preferred Stock provides for annual dividends,
when and if declared, in the amount of $60.00 per share per year
(6%), payable semi-annually in arrears in January and July. Such
dividends may be payable in cash or in additional shares of
Series F Preferred Stock, at the sole discretion of the
Companys Board of Directors. To date, such dividends have
been declared and paid through the issuance of 121.8 additional
shares of Series F Preferred Stock.

As of March 31, 2002 and 2001, there were
outstanding 7,708 shares of the Companys Series C
Convertible Redeemable Preferred Stock. The Series C
Preferred Stock provides for annual dividends, when and if
declared, in the amount of $72.50 per share per year (7.25%),
payable semi-annually in arrears in January and July. During the
fiscal year ended March 31, 2002, the Company declared and
paid such dividends, in cash, as the same became due.

17



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##### Table of Contents






Item 6.     Selected
Financial Data

The table below summarizes certain financial data
for the periods shown and is qualified in its entirety by, and
should be read in conjunction with, the Companys
Consolidated Financial Statements and the Notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in
this Annual Report.

|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |      |  
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- | ---------- | ---- | - | ---- | ---------- | ---- | - | ---- | ---------- | ----- | - | - | ---------- | ---- | - | - | ---------- | ---- | -
|                                                                                                    |                                                                                                      | 2002 |            | 2001 |   | 2000 |            | 1999 |   | 1998
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |     
|Statement of Operations Data:                                                                       |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Revenue                                                                                             |                                                                                                      | $    | 1,464,200  |      |   | $    | 2,126,695  |      |   | $    | 2,796,037  |       |   | $ | 1,822,990  |      |   | $ | 3,922,377  |     
|Cost of revenue                                                                                     |                                                                                                      |      | 981,311    |      |   |      | 1,517,610  |      |   |      | 1,767,714  |       |   |   | 1,184,998  |      |   |   | 2,296,409  |     
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Gross profit                                                                                        |                                                                                                      |      | 482,889    |      |   |      | 609,085    |      |   |      | 1,028,323  |       |   |   | 637,992    |      |   |   | 1,625,968  |     
|General and administrative expenses                                                                 |                                                                                                      |      | 3,075,610  |      |   |      | 3,933,995  |      |   |      | 7,448,615  |       |   |   | 5,805,192  |      |   |   | 5,645,559  |     
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Operating income (loss)                                                                             |                                                                                                      |      | (2,592,721 | )    |   |      | (3,324,910 | )    |   |      | (6,420,292 | )     |   |   | (5,167,200 | )    |   |   | (4,019,591 | )   
|Interest income (expense), net                                                                      |                                                                                                      |      | (689,693   | )    |   |      | (660,745   | )    |   |      | (624,966   | )     |   |   | (586,464   | )    |   |   | (209,694   | )   
|Other income (expense)                                                                              |                                                                                                      |      | 5,220      |      |   |      | 1,757,324  |      |   |      | 373,352    |       |   |   | 222,300    |      |   |   | 2,330,255  |     
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Income (loss) from continuing operations
    before income taxes                                    |                                                                                                      |      | (3,277,194 | )    |   |      | (2,228,331 | )    |   |      | (6,671,906 | )     |   |   | (5,531,364 | )    |   |   | (1,899,030 | )   
|Income taxes                                                                                        |                                                                                                      |      | (3,200     | )    |   |      | (3,200     | )    |   |      | (3,200     | )     |   |   | (3,200     | )    |   |   | (2,400     | )   
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                      |      | (3,280,394 | )    |   |      | (2,231,531 | )    |   |      | (6,675,106 | )     |   |   | (5,534,564 | )    |   |   | (1,901,430 | )   
|Extraordinary income on extinguishment of debt,
    net of income taxes                             |                                                                                                      |      |           |      |   |      | 1,154,094  |      |   |      | 3,489,803  |       |   |   | 99,656     |      |   |   |           |     
|Cumulative effect of change in accounting
    principle                                             |                                                                                                      |      |           |      |   |      | (237,065   | )    |   |      |           |       |   |   |           |      |   |   |           |     
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Net income (loss)                                                                                   |                                                                                                      |      | (3,280,394 | )    |   |      | (1,314,502 | )    |   |      | (3,185,303 | )     |   |   | (5,434,908 | )    |   |   | (1,901,430 | )   
|Accretion of preferred stock to redemption value                                                    |                                                                                                      |      | (108,298   | )    |   |      | (38,255    | )    |   |      | (35,819    | )     |   |   | (33,099    | )    |   |   | (30,584    | )   
|Excess of carrying value over amount paid to
    retire convertible redeemable preferred stock      |                                                                                                      |      |           |      |   |      | 7,678,597  |      |   |      |           |       |   |   |           |      |   |   |           |     
|Preferred stock dividends                                                                           |                                                                                                      |      | (860,453   | )    |   |      | (930,977   | )    |   |      | (1,486,954 | )     |   |   | (990,401   | )    |   |   | (526,000   | )   
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Net income (loss) applicable to common
    stockholders                                             |                                                                                                      | $    | (4,249,145 | )    |   | $    | 5,394,863  |      |   | $    | (4,708,076 | )     |   | $ | (6,458,408 | )    |   | $ | (2,458,014 | )   
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Basic net income (loss) per common share
    applicable to common stockholders:                     |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|                                                                                                    | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle  |      | $          | (.53 | ) |      | $          | .56  |   |      | $          | (1.03 | ) |   | $          | (.80 | ) |   | $          | (.30 | )
|                                                                                                    | Extraordinary income on extinguishment of debt,
    net                                              |      |            |     |   |      |            | .15  |   |      |            | .44   |   |   |            | .01  |   |   |            |     |  
|                                                                                                    | Cumulative effect of change in accounting
    principle                                              |      |            |     |   |      |            | (.03 | ) |      |            |      |   |   |            |     |   |   |            |     |  
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Net income (loss) per common share
    applicable to common stockholders                            |                                                                                                      | $    | (.53       | )    |   | $    | .68        |      |   | $    | (0.59      | )     |   | $ | (.79       | )    |   | $ | (.30       | )   
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Diluted net income (loss) per common share
    applicable to common stockholders:                   |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|                                                                                                    | Income (loss) before, extraordinary item and
    cumulative effect of change in accounting principle |      | $          | (.53 | ) |      | $          | .56  |   |      | $          | (1.03 | ) |   | $          | (.80 | ) |   | $          | (.30 | )
|                                                                                                    | Extraordinary income on extinguishment of debt,
    net                                              |      |            |     |   |      |            | .13  |   |      |            | .44   |   |   |            | .01  |   |   |            |     |  
|                                                                                                    | Cumulative effect of change in accounting
    principle                                              |      |            |     |   |      |            | (.03 | ) |      |            |      |   |   |            |     |   |   |            |     |  
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     
|Net income (loss) per common share
    applicable to common stockholders                            |                                                                                                      | $    | (.53       | )    |   | $    | .66        |      |   | $    | (.59       | )     |   | $ | (.79       | )    |   | $ | (.30       | )   
|                                                                                                    |                                                                                                      |      |            |      |   |      |            |      |   |      |            |       |   |   |            |      |   |   |            |     

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|                              |  |                 |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|----------------------------- |  | --------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                              |  |                
|                              |  | As of March 31,
|                              |  |                
|                              |  | 2002            |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                              |  |                 |            |      |  |      |            |      |  |     
|Balance Sheet Data:           |  |                 |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Current assets                |  | $               | 6,350,497  |      |  | $    | 7,701,501  |      |  | $    | 3,117,578  |  |  | $ | 15,536,283 |  |  | $ | 17,388,488 | 
|Total assets                  |  |                 | 24,224,892 |      |  |      | 29,646,307 |      |  |      | 37,700,950 |  |  |   | 47,630,860 |  |  |   | 41,891,968 | 
|Working capital               |  |                 | 3,900,325  |      |  |      | 5,932,450  |      |  |      | 703,780    |  |  |   | 13,616,371 |  |  |   | 16,517,459 | 
|Long-term debt and debentures |  |                 | 9,011,979  |      |  |      | 10,325,976 |      |  |      | 12,015,366 |  |  |   | 17,712,349 |  |  |   | 16,028,470 | 
|Redeemable preferred stock    |  |                 | 7,972,495  |      |  |      | 7,842,030  |      |  |      | 19,816,686 |  |  |   | 19,780,867 |  |  |   | 9,049,033  | 
|Common stockholders equity   |  |                 | 4,790,245  |      |  |      | 8,885,130  |      |  |      | 3,451,767  |  |  |   | 8,174,399  |  |  |   | 15,860,103 | 




Item 7.     Managements
Discussion And Analysis Of Financial Condition And Results Of
Operations

General

Until the fiscal year ended March 31, 2000,
the Companys principal activity had been to acquire and
develop water assets in California and in the Cherry Creek basin
in Colorado. The Company did so because it believed that there
was a growing demand for water resources in both of these areas,
which demand is expected to exceed the water resources currently
available to these areas. During the fiscal years ended
March 31, 2001 and 2000, the Company executed a variety of
wholesale water supply contracts with a number of retail
municipal water agencies. However, the Company encountered
significant regulatory obstacles to its attempts to develop and
transfer water for delivery to such customers. Accordingly, the
Company reduced its overhead expenditures, has deferred
development activities, and has concentrated its efforts in
California on overcoming the regulatory obstacles to water
transfers and on arranging water transfers that do not face such
obstacles. However, based on continuing regulatory difficulties
and administrative delays in completing water transfers and
generating revenue from water sales, the Company suspended
additional water acquisitions. The Company also faced
significant financial problems brought on by the expenditure of
funds for overhead and asset acquisitions in the face of
constrained operating revenue. Therefore, during the fiscal year
ended March 31, 2001, the Company explored various
alternatives, including the sale of the Company, the sale of
some or all of its assets, the liquidation of the Company, and
various restructuring alternatives. The Board of Directors
concluded that liquidation of the Company was not in the best
interest of the Companys shareholders and other
constituents. The Company has no formal plan to liquidate all or
substantially all of its assets. It is, however, continuing to
pursue a strategy of selling non-strategic assets to bolster its
cash position while concentrating its efforts on the development
and monetization of its existing strategic water-related assets
and assisting other water rights owners to consummate voluntary
water sales and transfers.

In connection with its plans to sell
non-strategic assets to generate liquidity and working capital,
and voluntarily restructure the Companys debt and
preferred stock capitalization in order to reduce the
Companys interest and preferred dividend burdens, the
Company has, since the beginning of the March 31, 2001
fiscal year effected the following:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the 2001 fiscal year, the Company sold
    (a) its fee interest in the Cucamonga Water Fee Agreement;
    (b) its Central Basin (California) water rights; and
    (c) 1000 acre-feet of its Mojave Basin (California) water
    rights.
|
| |  | During the fiscal year ended March 31, 2002,
    the Company completed the sale of its Glenn County, California
    farm property and 123 acres of its land holdings in San
    Bernardino County California.                                  

With regard to the restructuring strategy, the
Company (a) repurchased $2,456,000 of its Series C
redeemable preferred stock at an 82% discount from face value;
(b) retired its entire $10,000,000 issue of Series D
redeemable preferred stock for $3,854,000 in cash plus
$2,000,000 in face value of Series F redeemable preferred stock
and 175,000 shares of the Companys common stock; and
(c) retired $909,000 of its 9% Convertible Debentures at a
45% discount from their face value.

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Critical Accounting Policy

In response to the SECs release
No. 33-8040, Cautionary Advice Regarding Disclosure
About Critical Accounting Policies, the Company has
identified its most critical accounting policy as that related
to the carrying value of its water rights, which are carried at
cost. Any event or circumstance that indicates to the Company
that there is an impairment of the fair value of any of its
water rights is recorded in the period in which such event or
circumstance becomes known to the Company. During each of the
years in the three-year period ended March 31, 2002, no
such event or circumstance occurred that would, in the opinion
of management, signify the need for a material reduction in the
carrying value of any of the Companys water rights, except
as described in Note 15 in the consolidated financial
statements of the Company included in this Annual Report on
Form 10-K.

The critical estimates made by the Company in
assessing the existence of an impairment is associated with the
fair value of its water rights. When considered necessary,
management obtains third-party valuations to assist and support
their estimate of fair value. In the case of the Cherry Creek
Project, the Companys estimate of fair value is based upon
comparison with water rights sales in the area, upon various
third-party valuations performed for the Company within the
preceding six months, upon actual sales to an unaffiliated third
party of water derived from the Project, and upon current
negotiations for the sale of Water Contract Delivery Units.

Results of Operations

The following is a description of the
Companys results of operations for its three most recent
fiscal years.

The Company has previously reported its
continuing operations in two segments, water rights and real
estate. Upon the purchase of assets that contain both real
estate and water rights, the basis of such assets has been
allocated to real estate and water rights based on the relative
fair market values of the components at the time of acquisition.
As properties or water rights were sold, the allocated portion
of the basis was included in cost of revenue.

Beginning with the fiscal year ended
March 31, 2002, the Company has re-aligned its segment
reporting into two operating segments, California and Colorado.
The reasons for this change include the following:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Cherry Creek Project assets represent an
    integrated, stand-alone, water development project distinct from
    the California assets and operations of the Company.                                
|
| |  | California and Colorado are significantly
    different environments from the standpoint of water law, policy
    and regulation.                                                                         
|
| |  | Subject to shareholder approval, it is the
    Companys intention to move the Cherry Creek Project assets
    and operations into a wholly-owned subsidiary.                                             
|
| |  | Separately showing the California and Colorado
    assets and operations on a segment basis will enhance the
    readers understanding of the Companys financial
    position and results of operations.

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The segment information for the fiscal years
ended March 31, 2001 and 2000 have been restated to reflect
the new segment structure.

California Operations

|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 
|------------------------------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | 
|                                                        |  |                      
|                                                        |  | Years Ended March 31,
|                                                        |  |                      
|                                                        |  | 2002                  |           | 2001 |  | 2000
|                                                        |  |                       |           |      |  |     
|Revenue                                                 |  | $                     | 1,464,000 |      |  |      | 2,127,000 |   |  |  | 2,796,000 | 
|Cost of Revenue                                         |  |                       | 981,000   |      |  |      | 1,518,000 |   |  |  | 1,768,000 | 
|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 
|Gross Profit                                            |  |                       | 483,000   |      |  |      | 609,000   |   |  |  | 1,028,000 | 
|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 
|Gain on sales of assets                                 |  |                       | 17,000    |      |  |      | 896,000   |   |  |  | 40,000    | 
|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 
|Other, net                                              |  |                       | 5,000     |      |  |      | 861,000   |   |  |  | 333,000   | 
|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 
|Cumulative effect of change in accounting
    principle |  |                       |          |      |  |      | (237,000  | ) |  |  |          | 
|                                                        |  |                       |           |      |  |      |           |   |  |  |           | 

Revenues for each of the three fiscal years ended
March 31, 2002 (Fiscal 2002), March 31,
2001 (Fiscal 2001), and March 31, 2000
(Fiscal 2000) consisted solely of revenues generated
by the Company from its California water related activities. The
Company did not generate any revenues during the prior three
fiscal years from the sale of real estate (other than the recent
sale of non-strategic real estate as part of the Companys
restructuring plan, which sale is included as part of the
Other Non-Segment Information set forth below).
Water revenue for the three fiscal years generally includes
revenues from both the sale of water and from water lease
agreements with various municipal and agricultural water
districts in California. Cost of revenue for each fiscal year
includes the cost of water purchased for resale and amortization
of other resource acquisition costs.

Revenue for Fiscal 2002 decreased $663,000 (31%)
from Fiscal 2001 primarily because the Company disposed of a
water payment contract in Fiscal 2001 and because the Company
did not complete any new water transfer transactions in Fiscal
2002. During Fiscal 2001, revenues consisted of
(i) $1,287,000 that the Company received under a five-year
water sale agreement with the City of Inglewood, California, and
(ii) $840,000 from other sources, including a water
transfer agreement between the Company and the Santa Margarita
Water District. Although the Company continued to receive
payments under the City of Inglewood water sale agreement of
(amounting to $1,306,000 in Fiscal 2002), the Company did not
receive any payments under the Cucamonga Water Fee Agreement in
Fiscal 2002 which was disposed of in Fiscal Year 2001, and the
Company did not complete any new water transfers during Fiscal
Year 2002. The Companys interest in the Cucamonga Water
Fee Agreement payments was terminated in March 2001 upon the
sale of the underlying shares of the Fontana Union Water
Company. While the sale of the water payment interest underlying
the Cucamonga Water Fee Agreement generated a one-time $879,000
gain in Fiscal 2001, the Companys sale of this contract
right resulted in the loss of the annual payments in Fiscal
2002, and in future years. The Company was unable to complete
any additional water transfer transaction in Fiscal 2002
primarily due to the laws and regulations that have hindered the
Companys ability to complete such existing water transfer
agreements. The existence and continuation of the complex
structure of laws and regulations that govern and regulate water
transfers in California will continue to limit the
Companys ability to effect profitable water transfer
transactions in California in the future.

Water revenue for Fiscal 2001 decreased $669,000
(24%) from Fiscal 2000 as a result of decreased water sales.
Water revenue during Fiscal 2000 consisted of revenues from the
water sale agreement with the City of Inglewood ($1,283,000), a
water sale to the Westlands Water District of ($1,050,000), and
other water transactions that generated an aggregate revenue of
$463,000.

Cost of revenue decreased in Fiscal 2002 compared
to Fiscal 2001, and in Fiscal 2001 compared to Fiscal 2000. In
general, the cost of revenue in each instance decreased
primarily due to the decrease in water sale transactions. Cost
of revenue as a percentage of gross revenue decreased in Fiscal
2002 (at 67.0%) compared to Fiscal 2001 (71.4%), due to the
water transfer agreement with Santa Margarita Water District
which had a high associated cost of revenue in Fiscal 2001. Cost
of revenue as a percentage of gross revenue was 63.2% for

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Fiscal 2000. Since cost of revenue is based on
the isolated, individually negotiated and structured water
transactions, the Company does not believe that cost of revenue
as a percentage of gross revenue is a meaningful ratio in
comparing the Companys year-to-year results.


Gain on Sale of Water Rights.During Fiscal 2001, the Company sold
1,219 acre feet of annual groundwater rights in the Central
Basin in Los Angeles, California to a municipality in the Los
Angeles area. The Company realized a gain on that sale in the
amount of $428,000. During Fiscal 2001, the Company also sold
1,000 acre-feet of its water rights in the Mojave Basin of
California to an unaffiliated water management utility company,
and realized a gain on that sale in the amount of $465,000.
There were no comparable sales in Fiscal 2002 or Fiscal 2000.

Other.The Company
has owned a right to receive 3.7398% of the gross payments made
by the Cucamonga County Water District (CCWD),
located in San Bernardino County, California, in connection with
certain water sold or made available to CCWD by the Fontana
Union Water Company, a mutual water company principally owned by
Kaiser Ventures, Inc. (KVI), under a 100-year lease.
In Fiscal 2001 KVI completed the sale of its interest in the
Fontana Union Water Company to CCWD. As a result of the sale,
the Companys rights to receive the 3.7398% payments
terminated in exchange for 3.7398% of the net sales proceeds to
KVI, after certain offsets for KVIs transaction expenses.
On March 23, 2001, the Company received the net proceeds
from the foregoing sale, which payments resulted in a gain of
$879,000, after providing for transaction costs and a residual
interest due to an unrelated third party.

In Fiscal 2000, the Company sold 714.5 shares of
the Fontana Mutual Water Company, and realized a gain on the
sale in the amount of $395,000.

Cumulative Effect of Change in Accounting
Principle.In the fourth quarter of
Fiscal 2001, after giving consideration to guidance provided by
the SEC Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, the Company
performed a review of its revenue recognition policy affecting
water sales contracts. As a result of this review, the Company
revised its revenue recognition policy for water sales contracts
effective April 1, 2000, and restated its Fiscal 2001
quarterly operating results to reflect this new policy. The
issuance of SAB 101 changes the Companys revenue
recognition practices for non-refundable water contract
payments. The Company previously recognized water revenue upon
execution of a water sales contract, where delivery of water was
not a condition for realization of payment. After this change,
the Company recognizes revenue in conjunction with the delivery
of such water. Payments received in excess of revenue earned are
deferred until such water is delivered. Prior to April 1,
2000, this water sales contract provided water revenue of
$974,000 and cost of water revenue of $737,000. In accordance
with SAB 101, the Company recorded the cumulative effect of
the change in accounting principle with a charge of $237,000 to
the Fiscal 2001 consolidated statement of operations in the
fourth quarter of Fiscal 2001.

Colorado Operations

|                |  |             |   |      |  |      |   |  |  |  |   | 
|--------------- |  | ----------- | - | ---- |  | ---- | - |  |  |  | - | 
|                |  |            
|                |  | Years Ended
|                |  | March 31,  
|                |  |            
|                |  | 2002        |   | 2001 |  | 2000
|                |  |             |   |      |  |     
|Revenue         |  |             |  |      |  |      |  |  |  |  |  | 
|Cost of Revenue |  |             |  |      |  |      |  |  |  |  |  | 
|                |  |             |   |      |  |      |   |  |  |  |   | 
|Gross Profit    |  |             |  |      |  |      |  |  |  |  |  | 
|                |  |             |   |      |  |      |   |  |  |  |   | 

All of the Companys Colorado operations
involve the Companys Cherry Creek Project. During Fiscal
2002, the Company did not make any water sales or other water
transfers in Colorado, and therefore did not generate any
revenue from its Colorado operations in either Fiscal Years
2002, 2001 or 2000. Although the Cherry Creek Project has not
generated any revenue, the Company has commenced implementing a
plan to market and sell Water Contract Delivery Units
(WCDUs), contractual rights to receive a specified
portion of the undivided portions of the water production
capacity of the Cherry Creek Project to Colorado water agencies.
The Company is currently engaged in negotiations for the sale of
initial WCDUs which, in

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aggregate, would account for 600 acre-feet of
annual production. The Company anticipates that such sales, if
completed, will be made as isolated, individually negotiated
transactions, the timing and terms of which are inherently
unpredictable. Thus, there can be no assurance that WCDUs will,
in fact, be sold on terms satisfactory to the Company.


Subsequent to the close of the fiscal year ended
March 31, 2002, the Company executed a short-term water
sale agreement to deliver, and has subsequently delivered, a
small amount of water produced from nontributary resources of
the Cherry Creek Project. Neither the amount of water nor the
revenue derived from such sale is material. However, the Company
believes that this initial sale of water, entailing perfection
of the underlying water right, completion of physical
infrastructure and acquisition of various permits required for
the delivery, represents an important milestone in the
development of the Cherry Creek Project. No assurance can be
given that the Company will, in fact, be able to enter into any
water delivery contracts during the foregoing periods or at all,
or that such agreements will be profitable for the Company.

General and Administrative Expenses

|                                    |  |                       |           |      |  |      |           |  |  |  |           | 
|----------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                    |  |                      
|                                    |  | Years Ended March 31,
|                                    |  |                      
|                                    |  | 2002                  |           | 2001 |  | 2000
|                                    |  |                       |           |      |  |     
|General and Administrative Expenses |  | $                     | 3,076,000 |      |  |      | 3,934,000 |  |  |  | 7,449,000 | 

In addition to employee compensation expenses,
professional fees, travel/marketing expenses, office occupancy
charges, and other related expenses, the Company also includes
charges related to the impairment of its assets as part of its
general and administrative expenses. General and administrative
expenses for Fiscal 2002 decreased by $858,000 (22%) from Fiscal
2001. The decrease was primarily due to a $763,000 asset
impairment charge that the Company recognized in Fiscal 2001.
The Company did not have any asset impairment charges in Fiscal
2002. Therefore, excluding the Fiscal 2001 asset impairment
charge, general and administrative expenses in Fiscal 2002
decreased by approximately $100,000 (3%) from Fiscal 2001.
During Fiscal 2002, consulting and engineering fees decreased by
$335,000 from the prior year as a result of reduced transaction
activity. Payroll and fringe benefit costs increased by
$161,000, primarily due to a $154,000 non-cash expense for
deferred compensation arising from variable plan accounting for
certain incentive stock options granted to an officer and
director of the Company.

During Fiscal 2001, based upon a review of the
value of such assets, the Company recorded a non-cash impairment
of land of $318,000 and an impairment of water rights of
$445,000, all associated with a water development project that
the Company had initiated in Olancha, California. During Fiscal
2001, the Company determined that it could not successfully
complete the Olancha project as anticipated. Accordingly, the
Company returned all of the Olancha assets that it had
previously purchased to the seller and former owner of such
assets in exchange for the forgiveness of the outstanding
balance of the Companys obligation (purchase
financing) to the seller and former owner. These
impairment charges, therefore, were made to reduce the recorded
asset values of the returned assets following the return of the
assets to the seller in exchange for full satisfaction and
retirement of the Companys note in favor of the seller and
former owner in the amount of $758,000. (Note that, for
accounting purposes, the Company recognized an extraordinary
gain of $769,000 on the extinguishment of the foregoing debt.
See, Other Information, below.)

General and administrative expenses for Fiscal
2001 decreased by $3,515,000 (47%) from Fiscal 2000. The
decrease was primarily due to a decrease in consulting and
engineering fees of $779,000, a decrease in the allowance for
water projects of $1,019,000, a decrease in asset impairment
charges of $403,000, and a decrease of $783,000 in payroll and
office expenses as the Company downsized its staff, and
consolidated its administrative operations into its Point
Richmond, California headquarters. Consulting and engineering
fees decreased in Fiscal 2001 due to reduced transaction
activity. The allowance for water projects and the asset
impairment charges are based on the Companys periodic
review of the carrying value of its assets and are not directly
indicative of the Companys operations during any fiscal
year.

General and administrative expenses for Fiscal
2000 were $7,449,000, reflecting the payroll and fringe benefits
($2,243,000) and other miscellaneous charges ($1,566,000) in
effect before the Companys cost

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cutting efforts were implemented in Fiscal 2001.
In addition, general and administrative expenses in Fiscal 2000
also included a total of $1,155,000 of asset impairment charges
and $1,455,000 of consulting and engineering expenses. A
substantial portion of the consulting and engineering expenses
were incurred in connection with certain water transfer
transactions, not all of which were successfully completed. The
asset impairment charges were the result of the reduction of the
carrying value of the Companys water rights in the Mojave
Basin from $3,327,000 to its estimated fair value of $2,500,000.
This reduction of $827,000 has been recorded as an asset
impairment loss and included in general and administrative
expenses and reflected the Companys belief that the market
value of such rights had declined since they were purchased.
This decline was due, in part, to uncertainty surrounding the
appeal of the Mojave Basin adjudication to the California
Supreme Court, which was subsequently partially resolved by the
Mojave decision. The Company also took additional asset
impairment losses against the carrying value of certain mutual
water company shares ($204,000) and against the carrying value
of certain water storage activities ($124,000), reducing the
carrying value of the water storage assets to zero.


Other Information

|                          |  |                       |          |      |  |      |            |   |  |  |            |  
|------------------------- |  | --------------------- | -------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                          |  |                      
|                          |  | Years Ended March 31,
|                          |  |                      
|                          |  | 2002                  |          | 2001 |  | 2000
|                          |  |                       |          |      |  |     
|Interest income           |  | $                     | 170,000  |      |  |      | 478,000    |   |  |  | 622,000    |  
|Interest expense          |  |                       | (860,000 | )    |  |      | (1,139,000 | ) |  |  | (1,247,000 | )
|Extraordinary income, net |  |                       |         |      |  |      | 1,154,000  |   |  |  | 3,490,000  |  

Interest Income.Interest income is composed of
interest earned on the Companys cash and cash equivalents
and investments and interest earned on the secured promissory
notes the Company received in connection with the real estate
that it has sold. The secured notes bear interest at rates
between 8% and 9.5% per annum. Interest income decreased for
Fiscal 2002 from Fiscal 2001 due primarily to lower interest
rates and investment balances. Interest income decreased for
Fiscal 2001 from Fiscal 2000 due primarily to lower investment
balances.

Interest Expense.Interest expense for Fiscal 2002, 2001
and Fiscal 2000 included interest of $794,000, $849,000 and
$1,036,000, respectively, paid to the holders of the
Companys outstanding 9% Convertible Subordinated
Debentures Due 2005 (the Debentures). Fiscal 2002,
2001 and 2000 also included $64,000, $182,000 and $194,000
respectively of interest related to the five-year amortizing
term loan for the Inglewood water sale agreement. Interest of
$0, $0 and $84,000 was capitalized during Fiscal 2002, 2001, and
2000, respectively, in connection with the development of land.

Extraordinary Income, Net.During Fiscal 2001, the Company
abandoned its Olancha project in Inyo County, California, due to
insurmountable local regulatory impediments. In connection with
that abandonment, the Company returned the associated real
property to the seller and former owner of the property in
exchange for full satisfaction and retirement of the
Companys note in favor of the seller and former owner in
the amount of $758,000 and accrued interest of $11,000, and
recognized an extraordinary gain on extinguishment of debt, net
of income taxes, of $769,000.

In Fiscal 2001, the Company repurchased $909,000
of its outstanding Debentures, plus accrued interest of $14,000
for $514,000 in cash. After reducing related net deferred debt
costs of $24,000, the Company recognized a $385,000
extraordinary gain on the early extinguishment of debt.

In Fiscal 2000, the Company repurchased
$5,000,000 of its Debentures, plus accrued interest of $158,000,
for $1,500,000. After reducing related net deferred debt costs
of $273,000, the Company recognized an extraordinary income on
extinguishment of debt, net of income taxes of $3,490,000.

Liquidity and Capital Resources

As of March 31, 2002 the Company had working
capital and a current ratio of $3,900,000 and 2.59 to 1,
compared with $5,932,000 and 4.35 to l as of March 31, 2001.

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For the year ended March 31, 2002, the
Company recognized revenues of $1,464,000 and a gross profit of
$483,000, primarily from water sales and the lease of water
rights. However, the gross profit was offset by general and
administrative expenses consisting of payroll and fringe
benefits (of which $1,413,000 was paid in cash), consulting and
engineering costs ($328,000), and miscellaneous costs
($1,155,000). Although the Company recognized $170,000 from
interest income earned primarily from its cash and cash
equivalents investments, the interest income was offset by
$849,000 interest expense incurred on its Debentures and $10,000
of interest expense incurred on its term loan and other
obligations. As a result of the foregoing factors, the Company
had negative cash flows from operating activities of $2,413,000
for the year ended March 31, 2002.

The Company funded its working capital needs
during the year ended March 31, 2002 through its existing
operating revenue, its existing capital resources, and cash
generated by the sales of non-strategic assets. Such sales of
non-strategic assets consisted of (i) the sale of its Glenn
County California farmland for $218,000 in cash, and
(ii) the sale of two parcels of its San Bernardino
County, California real estate for $152,000 of cash and
interest-bearing notes in the amount of $67,000. The Company
intends to continue to sell its other non-strategic assets to
generate cash and reduce its operating expenses while it
continues to develop its principal water assets and wholesale
water activities to generate operating revenues in the future.
For example, during the current fiscal year ending
March 31, 2003, the Company plans to sell (a) its
remaining water rights in the Mojave Basin, (b) its
remaining land in Mojave, and (c) all of its Bear Valley
Mutual Water Company shares. These three assets collectively
have a book value of $2,863,000, and the Company expects to
realize more than the book value of these assets from these
sales, individually and collectively. Completion of such sales
is inherently uncertain.

Sales of non-strategic assets are expected to
generate gains and working capital during the current fiscal
year; however, gains from such sales are unpredictable as to
both timing and the amount realized. In addition, while revenues
from (i) existing water sales contracts; (ii) leasing
the Companys rice farms and ranches; and (iii) cash
received from principal and interest payments on promissory
notes held by the Company will be more predictable than the
occasional sales of non-strategic assets, such recurring
revenues will be insufficient to cover general and
administrative expenses, and interest on outstanding
indebtedness and cash dividends when and if declared on its
outstanding preferred stock. Revenue from water operations will
continue to be dependent on individually negotiated transactions
that are inherently uncertain as to timing and terms.
Nonetheless, based on the Companys current estimates of
sales of water and WCDUs of the Cherry Creek Project, revenues
from planned non-strategic asset sales and from its existing
operations are expected to be sufficient to fund the
Companys working capital needs during the current fiscal
year.

Because the Company anticipated that it may not
generate sufficient revenues from its principal water projects
in the near term, the Company has, during the past two years
also attempted to reduce the Companys on-going cash
payment obligations by restructuring some of the Companys
fixed obligations. For example, during Fiscal 2001, the Company
repurchased $909,000 of the Debentures plus accrued interest of
$14,000 for $514,000. In Fiscal 2000, the Company repurchased
$5,000,000 of the Debentures plus accrued interest of $158,000
for $1,500,000 in cash. The repurchase of these Debentures at a
discount reduced the total amount of debt that the Company will
eventually have to repay by $5,909,000 and reduced its annual
interest payment obligations by a total of $532,000.

During Fiscal, 2001, the Company also voluntarily
redeemed 2,456.5124 shares of its $1,000 stated value
Series C Preferred Stock at a purchase price of $180 per
share for a total purchase consideration of $442,000. The net
carrying value of such shares was $2,377,000 net of related
private placement costs of $80,000. Also, during Fiscal 2001,
the Company entered into an Investment Restructure Agreement
(the Agreement) with Agbar and Interagua for the
early redemption and retirement of the entire $10,000,000 of
issued and outstanding Series D Preferred Stock. In
consideration of that redemption and retirement, the Company
(1) declared and paid to Interagua the December 15,
2000 scheduled dividend of $188,000; (2) returned to
Interagua the remaining restricted cash balance (after giving
effect to the reduction of such balance resulting from the
aforementioned dividend) of $3,854,000; (3) issued 175,000
unregistered shares of the Companys Common Stock to
Interagua; and (4) issued to Interagua 2,000 shares of its
newly authorized Series F Convertible Redeemable Preferred
Stock, which shares of preferred stock have an aggregate stated
value of

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$2,000,000. Since the Series D Preferred
Stock accrued dividends on the $10,000,000 stated amount at a
rate of 7.5% per annum, and the new shares of Series F
Convertible Redeemable Preferred Stock accrue dividends on the
stated value of $2,000,000 at a rate of 6.0% per annum, the
Company has reduced its dividend payment obligations to
Interagua by $630,000 annually. Furthermore, the Company has the
option to pay these Series F dividends on the Series F
Convertible Redeemable Preferred Stock in additional shares of
such preferred stock rather than cash, thereby further reducing
its need to make cash payments from its limited resources.


In addition, during Fiscal 2002, the Company
continued to retire its bank debt, making scheduled principal
payments of approximately $747,000 on its bank debt associated
with the Companys five-year water lease transaction with
the City of Inglewood. In connection with that bank loan, the
Company agreed to maintain not less than $15 million of net
worth (as defined in the bank loan). During the quarter ended
September 30, 2001, the Companys net worth (as
defined) fell below that amount. Although the breach of the net
worth covenant technically constitutes a breach under the Bank
Loan, the bank has not declared a default under the loan. The
Bank Loan is being paid on a current basis, and there are
currently ample reserves and collateral to avoid any default in
the payment of the regularly scheduled debt payments. In light
of the uncured breach in the net worth covenant, the Company has
reclassified the entire Bank Loan balance of $1,269,000 as a
current liability at March 31, 2002. In the event that the
bank does declare a default, the Company may have to use its
existing resources to repay the loan in its entirety.

In addition, the Company has suspended the
acquisition of new water assets and has determined to limit its
investing and financing activities to those required to complete
development of some of its strategic assets, principally in Yuba
County, California and in the Cherry Creek basin in Colorado.
Accordingly, during Fiscal 2003, the Company anticipates making
capital expenditures totaling $575,000 in connection with the
Cherry Creek Project, dependent primarily upon completion of the
sale of WCDUs. Of that amount, only $125,000 would be expended
prior to any possible sale of its Cherry Creek Project WCDUs.
The Company believes that its current resources plus the funds
it expects to generate from the sale of non-strategic assets and
the sale of Cherry Creek Project WCDUs will be sufficient to
fund this planned capital outlays and operating expenses for the
fiscal year ending March 31, 2003.

Although the Company has attempted to reduce its
future commitments, the Company is still committed to certain
material expenditures over the next several years, including the
following:

|                                                                               |  |      |         |      |  |      |         |      |  |      |         |            |  |  |           |  |  |  |           |  |  |  |           | 
|------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---------- |  |  | --------- |  |  |  | --------- |  |  |  | --------- | 
|Commitments expiring in fiscal years:                                          |  | 2003 |         | 2004 |  | 2005 |         | 2006 |  | 2007 |         | Thereafter
|                                                                               |  |      |         |      |  |      |         |      |  |      |         |           
|Scheduled principal payments on existing
    outstanding indebtedness          |  | $    | 866,000 |      |  |      | 475,000 |      |  |      | 40,000  |            |  |  | 44,000    |  |  |  | 33,000    |  |  |  | 39,000    | 
|Semi-annual interest payments on Debentures                                    |  |      | 794,000 |      |  |      | 794,000 |      |  |      | 794,000 |            |  |  | 392,000   |  |  |  |          |  |  |  |          | 
|Principal redemption of Debentures                                             |  |      |        |      |  |      |        |      |  |      |        |            |  |  | 8,818,000 |  |  |  |          |  |  |  |          | 
|Payment on water purchase contract                                             |  |      | 300,000 |      |  |      |        |      |  |      |        |            |  |  |          |  |  |  |          |  |  |  |          | 
|Dividends on Series C Preferred Stock                                          |  |      | 559,000 |      |  |      | 559,000 |      |  |      | 559,000 |            |  |  | 559,000   |  |  |  | 280,000   |  |  |  | 280,000   | 
|Redemption of Series C Preferred stock (50%
    in FY 2007 and 50% in FY 2008) |  |      |        |      |  |      |        |      |  |      |        |            |  |  |          |  |  |  | 3,854,000 |  |  |  | 3,854,000 | 
|Redemption of Series F Preferred Stock
    (in FY 2011 and FY 2012)            |  |      |        |      |  |      |        |      |  |      |        |            |  |  |          |  |  |  |          |  |  |  | 2,128,000 | 

The holders of the 2121.80 outstanding shares of
Series F Preferred Stock are entitled to receive annual
dividends in the amount of $60.00 per share, payable
semi-annually on January 15, and July 15 of each year
(aggregating $127,000 per year). These dividends may be paid in
cash or in additional shares of Series F

26



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##### Table of Contents



Preferred Stock, at the Companys sole
discretion. During Fiscal 2002, the Company declared and issued
scheduled dividends, paid in 121.8 additional shares of
Series F Preferred Stock.


Based on its existing assets and on its projected
operating income and expenses, the Company anticipates that it
will be able to fund its foreseeable working capital needs for
at least one year from the date of this report from existing
cash, proceeds derived from on-going operations and proceeds
from the anticipated sale of certain existing non-strategic
assets and the sale of Cherry Creek Project WCDUs. However, no
assurance can be given that the Company will be able to sell its
assets as planned or, if the Company elects to do so, that it
will be able to raise additional funds.

The Company does not believe that inflation will
have a material impact on its results of operations.

New Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001, and also specifies the criteria that
intangible assets acquired in a business combination must meet
in order to be recognized and reported apart from goodwill.
SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The Company
will adopt the full provisions of SFAS 141 and 142 in the
fiscal year ending March 31, 2003. The Company does not
expect the adoption of SFAS 141 to have a material impact
on the Company. The Company has evaluated the impact of adopting
SFAS 142 and has concluded that its water rights represent
intangible assets which meet the scope of SFAS 142.
Pursuant to SFAS 142, the majority of the Companys
water rights will be amortized in conjunction with the amount of
water that may be used associated with such water rights.

In October 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 applies to all
long-lived assets (including discontinued operations), and
consequently amends APB Opinion No. 30, Reporting the
Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS
No. 144 develops an accounting model for long-lived assets
that are to be disposed of by sale. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value, less cost to
sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest
of the entity, and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS
No. 144 is effective for the Company for all financial
statements issued in Fiscal 2003. The Company will adopt
SFAS 144 in the fiscal year ending March 31, 2003. The
Company does not expect the adoption of SFAS 144 to have a
material impact on the Company.

In May 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. The standard rescinds FASB Statements
No. 4 and 64 that deal with issues relating to the
extinguishment of debt. The standard also rescinds FASB
Statement No. 44 that deals with intangible assets of motor
carriers. The standard modifies SFAS No. 13,
Accounting for Leases, so that certain capital lease
modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, the standard identifies amendments
that should have been made to previously existing pronouncements
and formally amends the appropriate pronouncements. This
statement is effective for fiscal years beginning after
May 15, 2002, but early adoption is permitted. The adoption
of SFAS No. 145 will not have a significant effect on the
Companys results of operations or its financial position.

27



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##### Table of Contents





| |             
| | ------------
| | Risk Factors

The ownership of the Companys common stock
involves numerous risks. The following discussion highlights
some of the risks the Company faces and some of the risks
related to the ownership of the Companys Common and
Preferred Stock.



| |                                            
| | -------------------------------------------
| | History of Losses in Principal
    Business

To date, the Companys activities have
primarily consisted of managing and developing its various water
rights and related assets, attempting to market and sell its
water assets, and those of its clients. The Company has
generated declining revenues of $1,464,000, $2,127,000, and
$2,796,000 during the fiscal years ended March 31, 2002,
2001 and 2000, respectively, while incurring net losses of
$3,280,000 $1,315,000 and $3,185,000 during such years,
respectively. Until Fiscal 2001, the Company had believed that
the regulatory obstacles that have prevented the development of
a water market in California would be lowered and that the
Company would be able to monetize its principal California water
assets and to substantially increase its revenues and generate
profits therefrom. During Fiscal 2002, those obstacles, along
with the spike in electric prices, prevented the Company from
completing any new water transfer transactions. If this
condition continues throughout Fiscal 2003, the Company will
continue to incur operating losses from its California
operations. In light of the Companys current financial
condition, losses from operations may not be sustainable for the
period of time required to develop a viable water market.



| |                                        
| | ---------------------------------------
| | Uncertainty of Future Water
    Revenue

The Companys ability to generate material
revenues in the future is dependent on (i) the
Companys ability to sell significant quantities of water
from its Yuba Property water assets, (ii) the
Companys ability to develop and sell water as part of the
Colorado Cherry Creek Project, (iii) the Companys
activities as an independent water wholesaler in California, and
(iv) the Companys ability to resolve regulatory
issues restricting its ability to sell and transport water to
potential customers in its California operations. The Company
has encountered significant regulatory obstacles in its attempts
to develop and transfer water for delivery to California
customers, which regulatory obstacles the Company does not
expect to overcome in the near future. Unless the regulatory
impediments are removed or modified, the Company believes that
its ability to generate significant revenues from its water
assets will be severely limited. No assurance can be given that
the regulatory obstacles currently limiting the Companys
ability to protect, develop and monetize its California water
assets will be changed, or if changed, that the changes will
occur in the near future. Finally, in addition to its ability to
overcome numerous regulatory impediments, the Companys
ability to become an independent water wholesaler in California
is dependent upon the Companys ability to arrange for the
transportation and storage of water and on its ability to
finance the foregoing activities. As a result, no assurance can
be given if the Company will ever be able to generate
significant revenues from its water transfer activities in
California.

In addition, before the Company can consummate
significant water deliveries in its Cherry Creek Project in
Colorado, the Company or the purchaser of such water will have
to build the infrastructure necessary to utilize the water. The
requirement to build the infrastructure will affect the ability
of the Company to sell its water, the price at which the water
can be sold, and the revenues that the Company can derive from
its Colorado water assets.



| |                            
| | ---------------------------
| | Limited Financial Resources

As a result of the operating losses sustained by
the Company during the last several years, which have been
partially offset in Fiscal 2002 and 2001 by sales of certain
non-strategic assets, the Company may not have sufficient
available cash to carry out its business plans over the longer
term. Regulatory difficulties that the Company has encountered
in California will continue to impact the Companys ability
to protect, develop and monetize its California water assets.
The time period in which a return could be realized on the
investment represented by these assets is unknown. These
uncertainties will make it difficult for the Company to obtain
new financing, if necessary, to pursue its business plans.

28



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##### Table of Contents





| |                                    
| | -----------------------------------
| | Breach of Covenant on Bank
    Loan

During the quarter ended September 30, 2001,
the Companys net worth (as defined) fell below the amount
required by a covenant in its guaranty of a Bank Loan to a
wholly-owned subsidiary of the Company. Although the breach of
the net worth covenant technically constitutes a breach under
the Bank Loan, the bank has not declared a default under the
Bank Loan. The Bank Loan is being paid on a current basis, and
there are currently ample reserves and collateral to avoid any
default in the payment of the regularly scheduled debt payments.
In light of the uncured breach in the net worth covenant, the
Company has reclassified the entire Bank Loan balance of
$1,269,000 as a current liability at March 31, 2002. In the
event that the bank does declare a default, the Company may have
to use its existing resources to repay the loan in its entirety.



| |                                               
| | ----------------------------------------------
| | Commitments for Purchase and Sale of
    Water

In May 1999, the Company entered into an
agreement for the purchase of 14,000 acre-feet of water from an
unaffiliated company. In accordance with the agreement, the
Company paid the seller a deposit of 50% of the total purchase
price and agreed to pay the remainder upon periodic delivery of
the water. During the year ended March 31, 2001 the Company
took delivery of 2,000 acre-feet of this water and redelivered
the water to an unaffiliated customer. In accordance with the
terms of the purchase agreement, the Company paid the seller the
remaining 50% of the purchase price for the 2,000 acre-feet
delivered. If the Company were called upon by the seller to take
delivery and pay for the remaining 12,000 acre-feet of water,
the Company would be obligated to pay the balance of the
purchase price. Such a payment would require the Company to use
a portion of its cash reserves and could adversely affect the
Companys liquidity and capital reserves. The Company
believes that it could re-sell the water on the same or better
terms. However, no assurance can be given that the Company could
quickly re-sell the 12,000 acre-feet of water or that the use of
its cash would not adversely affect the Companys on-going
operations.

In December 1999, the Company entered into an
agreement to sell the aforementioned 14,000 acre-feet of water
to a third-party buyer at a price that includes a profit to the
Company. As noted above, during the year ended March 31,
2001 the Company delivered 2,000 acre-feet of water to this
third-party buyer. The remaining 12,000 acre-feet of water
committed to purchase by the Company but not yet delivered by
the seller cannot currently be delivered to the buyer due to a
dispute between the buyer and certain other water agencies who
control the means of conveying such water to the buyer. The
buyer and the Company have mutually acknowledged that the
dispute (which is not material to the Company) represents a
force majeure event preventing current delivery. Although the
buyer has not been able to accept delivery of the water, the
buyer has paid the Company the entire re-sale purchase price for
the full 14,000 acre-feet, as required in the re-sale contract.
The balance of this prepayment against the Companys
delivery obligation is recorded as current deferred revenue of
$824,120.

The Company continues to be willing to deliver
the remaining 12,000 acre-feet of water to the contracted buyer
if and when the force majeure issues are resolved. Because
near-term resolution of these issues is doubtful, the Company
and the buyer are exploring alternatives. Currently, there can
be no assurance that viable and mutually attractive alternatives
will be identified and/or implemented.



| |                                                          
| | ---------------------------------------------------------
| | Delisting of Common Stock from Nasdaq
    National Market

The Companys common stock was de-listed
from trading on the Nasdaq National Market effective
August 30, 2000. Since then, the Companys common
stock has been traded electronically on the OTC Bulletin Board.
The effects of such a de-listing are unknown, but the Company
believes that the de-listing has reduced the Companys
visibility with investors and may adversely affect the
Companys ability to attract and obtain financing because
of the decreased liquidity of the Companys shares. See
Item 5. Market for Registrants Common Equity
and Related Stockholder Matters.






Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk


The Company is exposed to market risk primarily
due to fluctuations in interest rates. The Company utilizes both
fixed and variable rate debt. The Companys interest rate
risk management objective is to limit

29



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##### Table of Contents



the impact of interest rate changes on earnings
and cash flows and to lower the Companys overall borrowing
costs. To achieve this objective, the Company borrows primarily
at fixed rates and may enter into derivative financial
instruments such as interest rate caps in order to mitigate
interest rate risk on a related financial instrument. The
Company does not enter into any financial transactions for
speculative or trading purposes. The following table presents
principal cash flows and related weighted average interest rates
of the Companys long-term fixed rate and variable rate
debt for the fiscal periods indicated:


|                               |  |      |         |      |  |      |         |      |  |      |        |            |  |       |           |            |  |   |        |   |  |   |        |   |  |   |           |   |  |   |           | 
|------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ | ---------- |  | ----- | --------- | ---------- |  | - | ------ | - |  | - | ------ | - |  | - | --------- | - |  | - | --------- | 
|                               |  | 2003 |         | 2004 |  | 2005 |         | 2006 |  | 2007 |        | Thereafter |  | Total |           | Fair Value
|                               |  |      |         |      |  |      |         |      |  |      |        |            |  |       |           |           
|Fixed rate debt                |  | $    | 34,000  |      |  | $    | 37,000  |      |  | $    | 40,000 |            |  | $     | 8,862,000 |            |  | $ | 34,000 |   |  | $ | 38,000 |   |  | $ | 9,045,000 |   |  | $ | 9,045,000 | 
|Weighted average interest rate |  |      | 8.7     | %    |  |      | 8.3     | %    |  |      | 9.0    | %          |  |       | 9.0       | %          |  |   | 9.0    | % |  |   | 9.0    | % |  |   | 8.9       | % |  |   |           | 
|Variable rate debt             |  | $    | 832,000 |      |  | $    | 437,000 |      |  |      |       |            |  |       |          |            |  |   |       |   |  |   |       |   |  | $ | 1,269,000 |   |  | $ | 1,269,000 | 
|Weighted average interest rate |  |      | 3.375   | %    |  |      | 3.375   | %    |  |      |       |            |  |       |          |            |  |   |       |   |  |   |       |   |  |   | 3.375     | % |  |   |           | 

The Companys variable rate on its variable
rate debt is capped at 7.5%.

The variable rate debt totaling $1,269,000
represents the Bank Loan in connection with the Companys
water lease and sale transaction with the City of Inglewood. In
connection with that Bank Loan, the Company agreed to maintain
not less that $15 million of net worth (as defined). During
the quarter ended September 30, 2001, the Companys
net worth (as defined) fell below that amount. Although the
breach of the net worth covenant technically constitutes a
breach under the Bank Loan, the bank has not declared a default
under the Bank Loan. The Bank Loan is being paid on a current
basis, and there are currently ample reserves and collateral to
avoid any default in the payment of the regularly scheduled debt
payments. In light of the uncured breach in the net worth
covenant, the Company has reclassified the entire Bank Loan
balance of $1,269,000 as a current liability at March 31,
2002.






Item 8.     Consolidated
Financial Statements and Supplementary Data


The consolidated financial statements and the
report thereon and notes thereto, which are attached hereto as
pages F-1 through F-31, and indexed at page 32, are
incorporated herein by reference.






Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure


Not applicable




PART III






Item 10.     Directors
and Executive Officers of the Registrant


The information in the Companys Proxy
Statement to be filed by July 29, 2002 set forth under the
caption Election of Directors and Executive
Officers is incorporated herein by reference.






Item 11.     Executive
Compensation


The information in the Companys Proxy
Statement to be filed by July 29, 2002 set forth under the
caption Executive Compensation is incorporated
herein by reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information set forth under the caption
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters of the
Companys Proxy Statement to be filed by July 29, 2002
is incorporated herein by reference.

30



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##### Table of Contents








Item 13.     Certain
Relationships and Related Transactions


The information in the Companys Proxy
Statement to be filed by July 29, 2002 set forth under the
caption Certain Relationships and Related
Transactions is incorporated herein by reference.




PART IV






Item 14.     Exhibits,
Consolidated Financial Statement Schedules and Reports On
Form 8-K


Exhibits

The following exhibits are filed as a part of
this report

|     |  |                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation.(1)                                                                                                                                                            
|3.2  |  | By-laws of the Company.(2)                                                                                                                                                                  
|4.1  |  | Form of Common Stock Certificate.(1)                                                                                                                                                        
|4.2  |  | Form of Convertible Subordinated Debenture Due
    2005.(3)                                                                                                                                 
|4.3  |  | Certificate of Designations for Series C
    Convertible Redeemable Preferred Stock.(5)                                                                                                     
|4.4  |  | Certificate of Designations for Series D
    Convertible Redeemable Preferred Stock.(7)                                                                                                     
|4.5  |  | Certificate of Designations of Series E
    Participating Preferred Stock.(9)                                                                                                               
|4.6  |  | Certificate of Designations of Series F
    Convertible Redeemable Preferred Stock.(10)                                                                                                     
|10.1 |  | Form of Indemnity Agreement between the Company
    and its officers and directors.(2)                                                                                                      
|10.2 |  | 1993 Stock Option Plan.(4)                                                                                                                                                                  
|10.3 |  | Amendment to 1993 Stock Option Plan.(4)                                                                                                                                                     
|10.4 |  | 1997 Stock Option Plan.(6)                                                                                                                                                                  
|10.5 |  | Point Richmond Office Lease, dated
    December 18, 1998, as amended, by and between Western Water
    Company and Janis & Martin McNair.(9)                                                
|21   |  | Subsidiaries of the Company.                                                                                                                                                                
|23.1 |  | Consent of KPMG LLP.                                                                                                                                                                        
|99.1 |  | Rights Agreement, dated as of July 23, 1999,
    between the Company and ChaseMellon Shareholder Services,
    L.L.C., as Rights Agent, which includes the Form of Right
    Certificate.(8)
|99.2 |  | Investment Restructure Agreement, dated
    March 16, 2001.(10)                                                                                                                             



---



|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit to the
    Companys Form S-1, file no. 33-47606, and
    incorporated herein by reference.                                                         
|   
|(2) | Previously filed as an exhibit to the
    Companys Form 10, file no. 000-18756, and
    incorporated herein by reference.                                                         
|   
|(3) | Previously filed as an exhibit to the
    Companys Form 8-K dated September 22, 1995, and
    incorporated herein by reference.                                                   
|   
|(4) | Previously filed as an exhibit to the
    Companys Proxy Statement on Schedule 14A filed on
    February 7, 1994, which exhibit is hereby incorporated
    herein by reference.   
|   
|(5) | Previously filed as an exhibit to the
    Companys Annual Report on Form 10-K for the year ended
    March 31, 1996, which exhibit is hereby incorporated herein
    by reference.
|   
|(6) | Previously filed as an exhibit to the
    Companys Proxy Statement on Schedule 14A filed on
    September 12, 1997, which exhibit is hereby incorporated
    herein by reference. 
|   
|(7) | Previously filed as an exhibit to the
    Companys current report on Form 8-K filed on
    November 25, 1998, which exhibit is hereby incorporated
    herein by reference.       
|   
|(8) | Previously filed as an exhibit to the
    Companys Registration Statement on Form 8-A filed on
    August 8, 1999, which exhibit is hereby incorporated herein
    by reference.  

31



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##### Table of Contents





|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(9) | Previously filed as an exhibit to the
    Companys Annual Report on Form 10-K for the year ended
    March 31, 2000, which exhibit is hereby incorporated herein
    by reference.



|     |                                                                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to the
    Companys current report on Form 8-K filed on
    March 19, 2001, which exhibit is hereby incorporated herein
    by reference.

The following financial statements are filed as a
part of this report, appearing at the pages indicated:

|                                                                                                      |  |      |     | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Report of KPMG LLP, independent auditors                                                              |  |      | F-1 | 
|Consolidated Balance Sheets as of March 31,
    2002 and 2001                                         |  |      | F-2 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2002, 2001 and 2000           |  |      | F-3 | 
|Consolidated Statements of Stockholders
    Equity for the years ended March 31, 2002, 2001 and 2000 |  |      | F-4 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2002, 2001 and 2000           |  |      | F-5 | 
|Notes to Consolidated Financial Statements                                                            |  |      | F-6 | 

Reports on Form 8-K

None

32



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                      
| | ---------------------
| | WESTERN WATER COMPANY



| |     |                           
| | --- | --------------------------
| | By: | /s/ MICHAEL PATRICK GEORGE

| |                       
| | ----------------------
| |                       
| | Michael Patrick George
| | President             

Date: July 12, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                 |  |                                                                                                 |  |               |  | 
|------------------------------------------------ |  | ----------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                                 |  |                                                                                                 |  |              
|Signature                                        |  | Title                                                                                           |  | Date         
|                                                 |  |                                                                                                 |  |              
|                                                
|/s/ MICHAEL PATRICK GEORGEMichael Patrick George |  | President, Chief Executive Officer Chairman of
    the Board                                    |  | July 12, 2002
|                                                
|/s/ WILLIAM T. GOCHNAUERWilliam T. Gochnauer     |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | July 12, 2002
|                                                
|/s/ LEE K. HARRINGTONLee K. Harrington           |  | Director                                                                                        |  | July 12, 2002
|                                                
|/s/ DAVID A. ABELDavid A. Abel                   |  | Director                                                                                        |  | July 12, 2002
|                                                
|/s/ ROBERT A. BAKERRobert A. Baker               |  | Director                                                                                        |  | July 12, 2002

33



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INDEPENDENT AUDITORS REPORT

The Board of Directors

Western Water Company:


We have audited the accompanying consolidated
balance sheets of Western Water Company and subsidiaries (the
Company) as of March 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the years in the three-year
period ended March 31, 2002. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Western Water Company and
subsidiaries as of March 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years
in the three-year period ended March 31, 2002 in conformity
with accounting principles generally accepted in the United
States of America.



| |         
| | --------
| | KPMG LLP

San Francisco, California

July 9, 2002


F-1



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2002 and 2001


|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |             |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | 
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | 2002                       |            | 2001       
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |            
|ASSETS                                                                                                                                                                                                                                                                             
|Current Assets:                                                                                                                                                                                                                                                                     |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    | Cash and cash equivalents                                                                                               |                            | $          | 3,320,917   |            |   | $          | 7,138,615   |           
|                                                                                                                                                                                                                                                                                    | Accounts receivable  trade                                                                                             |                            |            | 12,625      |            |   |            |            |           
|                                                                                                                                                                                                                                                                                    | Current portion of notes receivable (Note 2)                                                                            |                            |            | 50,240      |            |   |            | 86,413      |           
|                                                                                                                                                                                                                                                                                    | Assets held for sale (Note 7)                                                                                           |                            |            | 2,863,158   |            |   |            |            |           
|                                                                                                                                                                                                                                                                                    | Other current assets                                                                                                    |                            |            | 103,557     |            |   |            | 476,473     |           
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | Total Current Assets       |            |             | 6,350,497  |   |            |             | 7,701,501  | 
|Notes receivable, less current portion (Note 2)                                                                                                                                                                                                                                     |                                                                                                                         |                            | 166,488    |             |            |   | 135,709    |            
|Land (Notes 4, 10 and 15)                                                                                                                                                                                                                                                           |                                                                                                                         |                            | 4,163,880  |             |            |   | 5,104,836  |            
|Water rights (Notes 5 and 16)                                                                                                                                                                                                                                                       |                                                                                                                         |                            | 11,602,744 |             |            |   | 13,267,387 |            
|Prepaid leasing costs, net of accumulated
    amortization (Note 6)                                                                                                                                                                                                                 |                                                                                                                         |                            | 1,204,826  |             |            |   | 1,951,546  |            
|Other water assets, net of accumulated
    amortization (Note 1)                                                                                                                                                                                                                    |                                                                                                                         |                            | 359,835    |             |            |   | 1,003,052  |            
|Deferred debt costs, net of accumulated
    amortization (Note 10 and 11)                                                                                                                                                                                                           |                                                                                                                         |                            | 192,559    |             |            |   | 257,750    |            
|Property and equipment, net of accumulated
    depreciation (Note 3)                                                                                                                                                                                                                |                                                                                                                         |                            | 51,705     |             |            |   | 86,274     |            
|Other assets                                                                                                                                                                                                                                                                        |                                                                                                                         |                            | 132,357    |             |            |   | 138,252    |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | Total Assets               |            | $           | 24,224,891 |   |            | $           | 29,646,307 | 
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                                                                           
|Current Liabilities:                                                                                                                                                                                                                                                                |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    | Accounts payable                                                                                                        |                            | $          | 104,709     |            |   | $          | 189,567     |           
|                                                                                                                                                                                                                                                                                    | Accrued expenses and other liabilities (Notes 9)                                                                        |                            |            | 218,883     |            |   |            | 798,982     |           
|                                                                                                                                                                                                                                                                                    | Deferred revenue on water contract (Note 1)                                                                             |                            |            | 824,120     |            |   |            |            |           
|                                                                                                                                                                                                                                                                                    | Current maturities of long-term debt (Note 10)                                                                          |                            |            | 1,302,460   |            |   |            | 780,502     |           
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | Total Current Liabilities  |            |             | 2,450,172  |   |            |             | 1,769,051  | 
|Deferred revenue on water contract (Note 1)                                                                                                                                                                                                                                         |                                                                                                                         |                            |           |             |            |   | 824,120    |            
|Long-term debt, less current maturities (Note 10)                                                                                                                                                                                                                                   |                                                                                                                         |                            | 194,201    |             |            |   | 1,494,864  |            
|9% Convertible subordinated debentures (Note 11)                                                                                                                                                                                                                                    |                                                                                                                         |                            | 8,817,778  |             |            |   | 8,831,112  |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | Total Liabilities          |            |             | 11,462,151 |   |            |             | 12,919,147 | 
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|Series C convertible redeemable preferred
    stock, $1,000 stated value, 100,000 shares authorized;
    7,708 shares issued and outstanding (aggregate liquidation
    preference of $7,708,000) at March 31, 2002 and 2001
    (Note 12)                                          |                                                                                                                         |                            | 7,503,650  |             |            |   | 7,475,121  |            
|Series F convertible redeemable preferred
    stock, $1,000 stated value, 6,000 shares authorized;
    2,121.8 and 2,000.0 shares issued and outstanding (aggregate
    liquidation preference of $2,121,800 and $2,000,000) at
    March 31, 2002 and 2001, respectively (Note 12) |                                                                                                                         |                            | 468,845    |             |            |   | 366,909    |            
|Stockholders Equity (Notes 12, 16, and 17):                                                                                                                                                                                                                                        |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    | Common stock, $.001 par value, 20,000,000 shares
    authorized; 8,410,212 shares issued at March 31, 2002 and
    2001 |                            |            | 8,410       |            |   |            | 8,410       |           
|                                                                                                                                                                                                                                                                                    | Additional paid-in capital                                                                                              |                            |            | 24,787,116  |            |   |            | 24,487,116  |           
|                                                                                                                                                                                                                                                                                    | Deferred compensation                                                                                                   |                            |            | (145,740    | )          |   |            |            |           
|                                                                                                                                                                                                                                                                                    | Accumulated deficit (accumulated since
    October 1, 1994)                                                             |                            |            | (18,484,671 | )          |   |            | (14,235,526 | )         
|                                                                                                                                                                                                                                                                                    | Treasury stock, at cost, 341,200 shares at
    March 31, 2002 and 2001                                                  |                            |            | (1,374,870  | )          |   |            | (1,374,870  | )         
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         | Total Stockholders Equity |            |             | 4,790,245  |   |            |             | 8,885,130  | 
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            
|Commitments and contingencies (Note 23)                                                                                                                                                                                                                                             |                                                                                                                         |                            |            |             |            |   |            |            
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                                                          |                                                                                                                         | $                          | 24,224,891 |             |            | $ | 29,646,307 |            
|                                                                                                                                                                                                                                                                                    |                                                                                                                         |                            |            |             |            |   |            |            

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended March 31, 2002, 2001 and
2000


|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |            |            |            |  
|-------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | -
|                                                                                                         |                                                                                                     | 2002                                                                                                |                         | 2001     |            | 2000      
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |           
|Revenue                                                                                                  |                                                                                                     | $                                                                                                   | 1,464,200               |          |            | $          | 2,126,695 |            |            | $          | 2,796,037  |           
|Cost of Revenue                                                                                          |                                                                                                     |                                                                                                     | 981,311                 |          |            |            | 1,517,610 |            |            |            | 1,767,714  |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Gross Profit                                                                                        |                         |          | 482,889    |            |           |            | 609,085    |            |            |            | 1,028,323  |           
|General and Administrative Expenses (Note 20)                                                            |                                                                                                     |                                                                                                     | 3,075,610               |          |            |            | 3,933,995 |            |            |            | 7,448,615  |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     |                                                                                                     | Operating Income (Loss) |          |            | (2,592,721 | )         |            |            | (3,324,910 | )          |            |            | (6,420,292 | )
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|Other Income (Expenses):                                                                                 |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         | Interest income                                                                                     |                                                                                                     |                         | 170,006  |            |            |           | 478,204    |            |            |            | 622,239    |           
|                                                                                                         | Interest expense                                                                                    |                                                                                                     |                         | (859,699 | )          |            |           | (1,138,949 | )          |            |            | (1,247,205 | )         
|                                                                                                         | Gain on sale of water rights (Note 5)                                                               |                                                                                                     |                         |         |            |            |           | 892,779    |            |            |            |           |           
|                                                                                                         | Gain on sale of land                                                                                |                                                                                                     |                         | 16,747   |            |            |           |           |            |            |            |           |           
|                                                                                                         | Gain on sale of investment in limited liability
    company, net (Note 7)                           |                                                                                                     |                         |         |            |            |           | 3,333      |            |            |            | 40,000     |           
|                                                                                                         | Other, net (Note 19)                                                                                |                                                                                                     |                         | (11,527  | )          |            |           | 861,212    |            |            |            | 333,352    |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     |                                                                                                     | (684,473                | )        |            |            | 1,096,579 |            |            |            | (251,614   | )         
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Income (Loss) Before Income Taxes                                                                   |                         |          | (3,277,194 | )          |           |            | (2,228,331 | )          |            |            | (6,671,906 | )         
|Income Taxes (Note 14)                                                                                   |                                                                                                     |                                                                                                     | 3,200                   |          |            |            | 3,200     |            |            |            | 3,200      |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Income (Loss) before extraordinary item and
    cumulative effect of change in accounting principle |                         |          | (3,280,394 | )          |           |            | (2,231,531 | )          |            |            | (6,675,106 | )         
|Extraordinary income on extinguishment of debt
    (Note 18)                                             |                                                                                                     |                                                                                                     |                        |          |            |            | 1,154,094 |            |            |            | 3,489,803  |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Net Income (Loss) before cumulative effect of
    change in accounting principle                    |                         |          | (3,280,394 | )          |           |            | (1,077,437 | )          |            |            | (3,185,303 | )         
|Cumulative effect of change in accounting
    principle (Note 1)                                         |                                                                                                     |                                                                                                     |                        |          |            |            | (237,065  | )          |            |            |           |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Net Income (Loss)                                                                                   |                         |          | (3,280,394 | )          |           |            | (1,314,502 | )          |            |            | (3,185,303 | )         
|Accretion of preferred stock to redemption value                                                         |                                                                                                     |                                                                                                     | (108,298                | )        |            |            | (38,255   | )          |            |            | (35,819    | )         
|Excess of carrying value over amount paid to
    retire convertible redeemable preferred stock (Note 12) |                                                                                                     |                                                                                                     |                        |          |            |            | 7,678,597 |            |            |            |           |           
|Preferred stock dividends                                                                                |                                                                                                     |                                                                                                     | (860,453                | )        |            |            | (930,977  | )          |            |            | (1,486,954 | )         
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Net Income (Loss) Applicable to Common
    Stockholders                                             |                         | $        | (4,249,145 | )          |           | $          | 5,394,863  |            |            | $          | (4,708,076 | )         
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|Basic net income (loss) per share applicable
    to common stockholders:                                 |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                     | $                       | (0.53    | )          |            | $         | 0.56       |            |            | $          | (1.03      | )         
|                                                                                                         | Extraordinary income on extinguishment of debt                                                      |                                                                                                     |                         |         |            |            |           | 0.15       |            |            |            | 0.44       |           
|                                                                                                         | Cumulative effect of change in accounting
    principle                                             |                                                                                                     |                         |         |            |            |           | (0.03      | )          |            |            |           |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Basic net income (loss) per share applicable
    to common stockholders                             |                         | $        | (0.53      | )          |           | $          | 0.68       |            |            | $          | (0.59      | )         
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|Diluted net income (loss) per share
    applicable to common stockholders:                               |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                     | $                       | (0.53    | )          |            | $         | 0.56       |            |            | $          | (1.03      | )         
|                                                                                                         | Extraordinary income on extinguishment of debt                                                      |                                                                                                     |                         |         |            |            |           | 0.13       |            |            |            | 0.44       |           
|                                                                                                         | Cumulative effect of change in accounting
    principle                                             |                                                                                                     |                         |         |            |            |           | (0.03      | )          |            |            |           |           
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           
|                                                                                                         |                                                                                                     | Diluted net income (loss) per share
    applicable to common stockholders                           |                         | $        | (0.53      | )          |           | $          | 0.66       |            |            | $          | (0.59      | )         
|                                                                                                         |                                                                                                     |                                                                                                     |                         |          |            |            |           |            |            |            |            |           

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Years Ended March 31, 2002, 2001 and
2000


|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |        |          |          |   |  |             |            |   |  |            |          |   |  |           |            |  
|------------------------- | ------------------------------------------------------- | ------------ | --------- | ---------- | - | -------- | ----- | ------------ | - | -------- | ---------- | ------------- |  | ------ | -------- | -------- | - |  | ----------- | ---------- | - |  | ---------- | -------- | - |  | --------- | ---------- | -
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |              
|                          |                                                         | Common Stock |           | Additional |   |          |       |              |   |          |            | Total        
|                          |                                                         |              |           | Paid-In    |   | Deferred |       | Accumulated  |   | Treasury |            | Stockholders
|                          |                                                         | Shares       |           | Amount     |   | Capital  |       | Compensation |   | Deficit  |            | Stock         |  | Equity
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |       
|Balance at March 31, 1999 |                                                         |              | 8,239,616 |            |   | $        | 8,240 |              |   |          | 24,347,502 |               |  |        |         |          |   |  | (14,922,313 | )          |   |  | (1,259,030 | )        |   |  | 8,174,399 |           
|                          | Net loss                                                |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (3,185,303 | ) |  |            |         |   |  |           | (3,185,303 | )
|                          | Vesting of compensatory stock options                   |              |           |           |   |          |       |             |   |          |            | 101,284       |  |        |          |         |   |  |             |           |   |  |            |         |   |  |           | 101,284    |  
|                          | Preferred dividends                                     |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (1,486,954 | ) |  |            |         |   |  |           | (1,486,954 | )
|                          | Accretion of preferred stock                            |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (35,819    | ) |  |            |         |   |  |           | (35,819    | )
|                          | Payments to acquire 49,000 shares of treasury
    stock |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             |           |   |  |            | (115,840 | ) |  |           | (115,840   | )
|                          | Cancellation of Common Stock                            |              |           | (4,604     | ) |          |       | (5           | ) |          |            | 5             |  |        |          |         |   |  |             |           |   |  |            |         |   |  |           |           |  
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |        |          |          |   |  |             |            |   |  |            |          |   |  |           |           
|Balance at March 31, 2000 |                                                         |              | 8,235,212 |            |   | $        | 8,235 |              |   |          | 24,448,791 |               |  |        |         |          |   |  | (19,630,389 | )          |   |  | (1,374,870 | )        |   |  | 3,451,767 |           
|                          | Net loss                                                |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (1,314,502 | ) |  |            |         |   |  |           | (1,314,502 | )
|                          | Preferred dividends                                     |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (930,977   | ) |  |            |         |   |  |           | (930,977   | )
|                          | Accretion of preferred stock                            |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (38,255    | ) |  |            |         |   |  |           | (35,346    | )
|                          | Issuance of Common Stock                                |              |           | 175,000    |   |          |       | 175          |   |          |            | 38,325        |  |        |          |         |   |  |             |           |   |  |            |         |   |  |           | 38,500     |  
|                          | Retirement of Series C Preferred Stock                  |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | 1,934,740  |   |  |            |         |   |  |           | 1,934,740  |  
|                          | Retirement of Series D Preferred Stock                  |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | 5,743,857  |   |  |            |         |   |  |           | 5,743,857  |  
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |        |          |          |   |  |             |            |   |  |            |          |   |  |           |           
|Balance at March 31, 2001 |                                                         |              | 8,410,212 |            |   | $        | 8,410 |              |   |          | 24,487,116 |               |  |        |         |          |   |  | (14,235,526 | )          |   |  | (1,374,870 | )        |   |  | 8,885,130 |           
|                          | Net loss                                                |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (3,280,394 | ) |  |            |          |   |  |           | (3,280,394 | )
|                          | Preferred dividends                                     |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (860,453   | ) |  |            |          |   |  |           | (860,453   | )
|                          | Accretion of preferred stock                            |              |           |           |   |          |       |             |   |          |            |              |  |        |          |         |   |  |             | (108,298   | ) |  |            |          |   |  |           | (108,298   | )
|                          | Deferred compensation                                   |              |           |           |   |          |       |             |   |          |            | 300,000       |  |        |          | (145,740 | ) |  |             |           |   |  |            |         |   |  |           | 154,260    |  
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |        |          |          |   |  |             |            |   |  |            |          |   |  |           |           
|Balance at March 31, 2002 |                                                         |              | 8,410,212 |            |   | $        | 8,410 |              |   |          | 24,787,116 |               |  |        | (145,740 | )        |   |  | (18,484,671 | )          |   |  | (1,374,870 | )        |   |  | 4,790,245 |           
|                          |                                                         |              |           |            |   |          |       |              |   |          |            |               |  |        |          |          |   |  |             |            |   |  |            |          |   |  |           |           

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended March 31, 2002, 2001 and
2000


|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |            |   |          |            |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------- | -------------------------------------- | ------------------------------------- | - | -------- | ---------- | ---------- | - | -------- | ---------- | ---------- | - | -------- | ---------- | -
|                                                                                |                                                                   | 2002                    |                                        | 2001                                  |   | 2000    
|                                                                                |                                                                   |                         |                                        |                                       |   |         
|Cash Flows from Operating Activities:                                           |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Net loss                                                                        |                                                                   | $                       | (3,280,394                             | )                                     |   |          | (1,314,502 | )          |   |          | (3,185,303 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|                                                                                | Depreciation and amortization                                     |                         |                                        | 1,028,453                             |   |          |            | 1,236,127  |   |          |            | 1,097,346  |  
|                                                                                | Compensation expense on vesting of compensatory
    stock options |                         |                                        | 154,260                               |   |          |            |           |   |          |            | 101,284    |  
|                                                                                | Gain on sale of water rights                                      |                         |                                        |                                      |   |          |            | (892,779   | ) |          |            |           |  
|                                                                                | Gain on sale of investment in limited liability
    company       |                         |                                        |                                      |   |          |            | (3,333     | ) |          |            | (40,000    | )
|                                                                                | Gain on sale of other water assets                                |                         |                                        |                                      |   |          |            | (879,208   | ) |          |            | (394,745   | )
|                                                                                | Asset impairment charge                                           |                         |                                        |                                      |   |          |            | 762,770    |   |          |            | 1,165,982  |  
|                                                                                | Gain on sale of land                                              |                         |                                        | (16,747                               | ) |          |            |           |   |          |            |           |  
|                                                                                | Extraordinary income on early extinguishment of
    debt          |                         |                                        |                                      |   |          |            | (1,154,094 | ) |          |            | (3,489,803 | )
|                                                                                | Cumulative effect of change in accounting
    principle           |                         |                                        |                                      |   |          |            | 237,065    |   |          |            |           |  
|                                                                                | Allowance for (recovery of) water project costs                   |                         |                                        |                                      |   |          |            | (85,425    | ) |          |            | 1,018,717  |  
|                                                                                | Discount on accrued income receivable                             |                         |                                        |                                      |   |          |            |           |   |          |            | 75,880     |  
|                                                                                | (Gain) loss on disposition of property and
    equipment          |                         |                                        |                                      |   |          |            |           |   |          |            | 2,544      |  
|                                                                                | Loss on discount of notes receivable                              |                         |                                        |                                      |   |          |            | 11,108     |   |          |            |           |  
|                                                                                | Changes in assets and liabilities:                                |                         |                                        |                                       |   |          |            |            |   |          |            |            |  
|                                                                                |                                                                   | (Increase) decrease in: |                                        |                                       |   |          |            |            |   |          |            |            |   |         
|                                                                                |                                                                   |                         | Other current assets                   |                                       |   | 360,291  |            |            |   | 515,256  |            |            |   | (570,099 | )         
|                                                                                |                                                                   |                         | Land                                   |                                       |   |         |            |            |   |         |            |            |   | (594,353 | )         
|                                                                                |                                                                   |                         | Water rights                           |                                       |   |         |            |            |   |         |            |            |   | 737,055  |           
|                                                                                |                                                                   |                         | Other assets                           |                                       |   | 5,895    |            |            |   | (26,256  | )          |            |   | (59,912  | )         
|                                                                                |                                                                   | Increase (decrease) in: |                                        |                                       |   |          |            |            |   |          |            |            |   |         
|                                                                                |                                                                   |                         | Accounts payable                       |                                       |   | (84,858  | )          |            |   | 89,015   |            |            |   | 8,444    |           
|                                                                                |                                                                   |                         | Accrued expenses and other liabilities |                                       |   | (580,099 | )          |            |   | 301,336  |            |            |   | 433,988  |           
|                                                                                |                                                                   |                         | Deferred water revenue                 |                                       |   |         |            |            |   | (150,000 | )          |            |   |         |           
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|                                                                                |                                                                   |                         |                                        | Net cash used in operating activities |   |          | (2,413,199 | )          |   |          | (1,352,920 | )          |   |          | (3,692,975 | )
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Cash Flows from Investing Activities:                                           |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|                                                                                | Principal payments received on notes receivable                   |                         |                                        | 107,594                               |   |          |            | 448,090    |   |          |            | 361,382    |  
|                                                                                | Purchase of property and equipment                                |                         |                                        | (12,802                               | ) |          |            | (16,410    | ) |          |            | (44,155    | )
|                                                                                | Purchase of available-for-sale securities                         |                         |                                        |                                      |   |          |            |           |   |          |            | (3,008,387 | )
|                                                                                | Sales of available-for-sale securities                            |                         |                                        |                                      |   |          |            |           |   |          |            | 17,069,797 |  
|                                                                                | Sales of water rights                                             |                         |                                        |                                      |   |          |            | 5,589,880  |   |          |            |           |  
|                                                                                | Sales of other water assets                                       |                         |                                        |                                      |   |          |            | 2,700,593  |   |          |            | 929,535    |  
|                                                                                | Sales of assets                                                   |                         |                                        | 371,476                               |   |          |            |            |   |          |            |            |  
|                                                                                | Additions to water rights                                         |                         |                                        | (3,510                                | ) |          |            | (28,681    | ) |          |            | (419,991   | )
|                                                                                | Purchase of water rights                                          |                         |                                        |                                      |   |          |            |           |   |          |            | (1,325,000 | )
|                                                                                | Additions to other water assets                                   |                         |                                        |                                      |   |          |            |           |   |          |            | (155,439   | )
|                                                                                | Additions to land                                                 |                         |                                        | (68,978                               | ) |          |            |           |   |          |            |           |  
|                                                                                | Prepayment of leasing costs                                       |                         |                                        | (173,879                              | ) |          |            | (166,320   | ) |          |            | (517,333   | )
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Net cash provided by investing activities                                       |                                                                   |                         | 219,901                                |                                       |   |          | 8,527,152  |            |   |          | 12,890,409 |           
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Cash Flows from Financing Activities:                                           |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|                                                                                | Proceeds from long-term debt                                      |                         |                                        |                                      |   |          |            |           |   |          |            | 800,000    |  
|                                                                                | Purchase of convertible subordinated debentures                   |                         |                                        | (7,409                                | ) |          |            | (499,888   | ) |          |            | (1,500,000 | )
|                                                                                | Preferred stock dividends                                         |                         |                                        | (838,286                              | ) |          |            | (930,977   | ) |          |            | (1,486,954 | )
|                                                                                | Purchase of common stock                                          |                         |                                        |                                      |   |          |            |           |   |          |            | (115,840   | )
|                                                                                | Purchase of convertible redeemable preferred stock                |                         |                                        |                                      |   |          |            | (442,171   | ) |          |            |           |  
|                                                                                | Principal payments on long-term debt                              |                         |                                        | (778,705                              | ) |          |            | (696,983   | ) |          |            | (1,245,721 | )
|                                                                                | Cash restricted to fund water development costs                   |                         |                                        |                                      |   |          |            |           |   |          |            | (4,416,431 | )
|                                                                                | Release of restricted cash                                        |                         |                                        |                                      |   |          |            | 562,788    |   |          |            |           |  
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|                                                                                |                                                                   |                         |                                        | Net cash used in financing activities |   |          | (1,624,400 | )          |   |          | (2,007,231 | )          |   |          | (7,964,946 | )
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Net (decrease) increase in cash and cash
    equivalents                        |                                                                   |                         | (3,817,698                             | )                                     |   |          | 5,167,001  |            |   |          | 1,232,488  |           
|Cash and Cash Equivalents, beginning of year                                    |                                                                   |                         | 7,138,615                              |                                       |   |          | 1,971,614  |            |   |          | 739,126    |           
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           
|Cash and Cash Equivalents, end of year                                          |                                                                   | $                       | 3,320,917                              |                                       |   |          | 7,138,615  |            |   |          | 1,971,614  |           
|                                                                                |                                                                   |                         |                                        |                                       |   |          |            |            |   |          |            |           

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note
1.     Organization and Summary of
Significant Accounting Policies and Practices



| |                        
| | -----------------------
| | Description of Business

Western Water Company and subsidiaries (the
Company) identify, manage, acquire, develop, sell
and lease water and water rights in the western United States.
The Company, directly and indirectly, owns a diverse portfolio
of water rights, as well as real estate, in California and
Colorado. The Companys current principal activity is the
acquisition and development of water rights and the sale or
lease of its water. The Company is also engaged in assisting
unaffiliated owners of water rights in obtaining revenue from
their water rights.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements of Western
Water Company include Western Water Service Company and YG
Procyon Corporation, the Companys wholly-owned
subsidiaries, and YG Rice Farms, L.P., a limited partnership
directly and indirectly wholly-owned and controlled by the
Company, and Western Agua, L.P., a limited partnership in which
the Company is the general partner and owns a 70% interest. All
inter-company balances and transactions have been eliminated in
consolidation.



| |                                                    
| | ---------------------------------------------------
| | Use of Estimates and Critical Accounting
    Policy

Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.

In response to the SECs release
No. 33-8040, Cautionary Advice Regarding Disclosure
About Critical Accounting Policies, the Company has
identified its most critical accounting policy as that related
to the carrying value of its water rights, which are carried at
cost. Any event or circumstance that indicates to the Company
that there is an impairment of the fair value of its water
rights is recorded in the period in which such event or
circumstance becomes known to the Company. During each of the
years in the three-year period ended March 31, 2002, no
such event or circumstance occurred that would, in the opinion
of management, signify the need for a material reduction in the
carrying value of any of the Companys water rights, except
as described in Note 15.

The critical estimates made by the Company in
assessing the existence of an impairment is associated with the
fair value of its water rights. When considered necessary,
management obtains third-party valuations to assist and support
their estimate of fair value. In the case of the Cherry Creek
Project, the Companys estimate of fair value is based upon
comparison with water rights sales in the area, upon various
third-party valuations performed for the Company within the
preceding six months, upon actual sales to an unaffiliated third
party of water derived from the Project, and upon current
negotiations for the sale of Water Contract Delivery Units.



| |                 
| | ----------------
| | Cash Equivalents

The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company provides for valuation allowances for
notes receivable when repayment becomes doubtful or amounts due
are delinquent and in excess of the value of the collateral.
Notes are deemed delinquent when

F-6



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

they are more than 90 days past due. As of
March 31, 2002 and 2001, no allowance for doubtful accounts
has been provided since the Companys management believes
that the value of the collateral is in excess of the total
receivables, and there are no delinquent notes.



| |                     
| | --------------------
| | Assets Held for Sale

Assets held for sale are carried at the lower of
the carrying amount or fair value less costs of sale. The basis
of the water rights and properties includes the allocation of
original purchase price and direct development costs. Costs are
allocated to water rights and properties by the specific
identification method whenever possible. Otherwise, development
costs are allocated based on the relative fair value of the
water rights and properties.



| |             
| | ------------
| | Water Rights

Water rights consist of various water interests
acquired directly or through the acquisition of real estate
properties. Water rights are stated at cost and consist of an
allocation of the original purchase price between water rights
and real estate properties based on their relative fair values,
plus other direct development and acquisition costs and an
adjustment as a result of the quasi-reorganization (see
Note 16).

Costs are allocated to water rights by the
specific identification method whenever possible. Otherwise,
development costs are allocated based on the relative fair value
of the water rights. In addition, interest costs are capitalized
during the development period. Capitalized interest for the
years ended March 31, 2002, 2001 and 2000 was $0, $0, and
$83,749, respectively.

The Company capitalizes costs directly related to
water projects under development that are considered probable.
The Company provides an allowance for these capitalized water
project costs, based primarily upon the Companys
historical experience with similar projects.



| |                      
| | ---------------------
| | Prepaid Leasing Costs

Prepaid leasing costs are lease payments or other
development costs incurred directly in connection with water
rights leased by the Company that are considered probable of
providing a benefit to the Company in future periods. The
Company provides an allowance for certain prepaid leasing costs
in which the Company has not entered into a related water
contract to sell such leased water, based primarily upon the
Companys historical experience with similar projects. Upon
the execution of a contract to sell such leased water to a
customer, the Company amortizes the prepaid leasing costs over
the life of the water sales contract using the straight-line
method.



| |                   
| | ------------------
| | Other Water Assets

As of March 31, 2002 and 2001, other water
assets included certain water rights which generate revenues
from the Inglewood lease transaction, described below
(Note 6).

As of March 31, 2001, other water assets
also included 4,950 shares of a mutual water company in
Southern California, which is classified as assets held for sale
as of March 31, 2002 (Note 7).

Prior to the sale in March 2001, other water
assets also included the Companys right to receive
3.7398 percent of payments made with respect to sales of
water by a non-affiliated third party to the Cucamonga County
Water District. These rights were being amortized using the
straight-line method over a 40-year period. The net carrying
value of this right at the time of sale of $1,821,385, net of
accumulated amortization of $467,595 was written-off and
included as a component of other income.

F-7



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Deferred Debt Costs

Deferred debt costs are amortized using the
straight-line method, which approximates the interest method,
over the life of the related debt.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation expense is computed on the straight-line method
over the estimated useful lives ranging from five to ten years
and totaled $47,372, $102,639, and $58,567, for the years ended
March 31, 2002, 2001, and 2000, respectively.



| |                  
| | -----------------
| | Stock Option Plan

The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in
accounting for its outstanding stock options. As such,
compensation expense would generally be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. Such compensation is expensed
pro-rata over the vesting period of the stock option. Repriced
stock options are accounted for using variable plan accounting
which requires periodic re-measurement of the intrinsic value of
the related stock option until its exercise, forfeiture, or
cancellation.



| |                                
| | -------------------------------
| | Revenue Recognition 
    Water

Water revenue is recorded when realizable and
earned. Revenue from long-term water rights leasing contracts
with fixed rate increases are recognized on a straight line
method over the contractual period of the water rights lease.
Revenue from water sales contracts are recognized in conjunction
with the delivery of such water. Payments received in excess of
such revenue earned are deferred until such water is delivered.
Sales of water rights are accounted for under the full accrual
method. Under that method, gain is recognized when the
collectibility of the sales price is reasonably assured and the
earnings process is virtually complete. When a sale does not
meet the requirements for full accrual recognition, gain is
deferred until the requirements are met.

In the fourth quarter of Fiscal 2001, after
giving consideration to guidance provided by the SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition
in Financial Statements, the Company performed a review of its
revenue recognition policy affecting water sales contracts. As a
result of this review, the Company revised its revenue
recognition policy for water sales contracts effective
April 1, 2000, and restated its Fiscal 2001 quarterly
operating results to reflect this new policy. The issuance of
SAB 101 changes the Companys revenue recognition
practices for non-refundable water contract payments. The
Company previously recognized water revenue upon execution of a
water sales contract, where delivery of water was not a
condition for realization of payment. Prior to April 1,
2000, this water sales contract provided water revenue of
$974,120 and cost of water revenue of $737,055. In accordance
with SAB 101, the Company recorded the cumulative effect of the
change in accounting principle with a charge of $237,065 to the
Fiscal 2001 consolidated statement of operations in the fourth
quarter of Fiscal 2001. Included in the results of operations
for the year ended March 31, 2001 is water revenue of
$150,000 and cost of water revenue of $105,300 that was
previously recognized in the results of operations for the year
ended March 31, 2000 under the prior method.

F-8



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma effect of retroactive application
to the results of operations for the fiscal years ended
March 31, 2002, 2001 and 2000 only affected fiscal 2000, as
follows:

|                                                    |             |  |   |            |  
|--------------------------------------------------- | ----------- |  | - | ---------- | -
|Fiscal Year Ended March 31, 2000                    |             | 
|                                                    |             | 
|Net income (loss):                                  |             |  |   |           
|                                                    | As reported |  | $ | (4,708,076 | )
|                                                    | Pro forma   |  |   | (4,945,141 | )
|Net income (loss) per share 
    basic and diluted |             |  |   |           
|                                                    | As reported |  |   | (.59       | )
|                                                    | Pro forma   |  |   | (.62       | )



| |                               
| | ------------------------------
| | Revenue Recognition 
    Land

Sales of land are generally accounted for under
the full accrual method. Under that method, a gain is recognized
when the collectibility of the sales price is reasonably assured
and the earnings process is virtually complete. When a sale does
not meet the requirements for full accrual recognition, the gain
is deferred until these requirements are met.



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Impairment of Long-Lived Assets and
    Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable
intangibles (e.g., water rights) are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows (undiscounted and without interest) that are expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less selling
costs (Note 15).



| |                            
| | ---------------------------
| | Net Income (Loss) Per Share

Basic net income (loss) per share is
computed by dividing net income (loss) applicable to common
stockholders by the weighted average number of common shares
outstanding during each period. Diluted net income
(loss) per share is computed by dividing the amount of net
income (loss) applicable to common stockholders by the weighted
average number of common shares outstanding during each period
plus all potentially dilutive common shares outstanding during
the reporting period.

The weighted average shares used for basic and
diluted EPS computation were 8,069,012, and
7,913,542 shares for the years ended March 31, 2002,
and 2000, respectively.

F-9



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the support for
the computation of basic and diluted net income (loss) per
common share applicable to common stockholders for the year
ended March 31, 2001:

|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |       |  
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | --------- | --------- | - |  | ---- | ----- | -
|                                     |                                                                                                                                                                                          | Total |           | Per Share
|                                     |                                                                                                                                                                                          |       |           |          
|Basic:                               |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Income before extraordinary item and cumulative
    effect of change in accounting principle                                                                                             |       | $         | 4,477,834 |   |  |      | 0.56  |  
|                                     | Extraordinary income on extinguishments of debt                                                                                                                                          |       |           | 1,154,094 |   |  |      | 0.15  |  
|                                     | Cumulative effect of change in accounting
    principle                                                                                                                                  |       |           | (237,065  | ) |  |      | (0.03 | )
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Net income per common share applicable to common
    stockholders                                                                                                                        |       | $         | 5,394,863 |   |  |      | 0.68  |  
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Weighted average number of shares                                                                                                                                                        |       |           | 7,901,204 |   |  |      |       |  
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|Diluted:                             |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Income before extraordinary item and cumulative
    effect of change in accounting principle                                                                                             |       | $         | 4,477,834 |   |  |      |       |  
|                                     | Add: Series D preferred stock dividends                                                                                                                                                  |       |           | 562,500   |   |  |      |       |  
|Accretion on Series F referred stock |                                                                                                                                                                                          |       | 2,909     |           |   |  |      |      
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     |                                                                                                                                                                                          |       | 5,043,243 |           |   |  | 0.56 |      
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Extraordinary income on extinguishments of debt                                                                                                                                          |       |           | 1,154,094 |   |  |      | 0.13  |  
|                                     | Cumulative effect of change in accounting
    principles                                                                                                                                 |       |           | (237,065  | ) |  |      | (0.03 | )
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Net income per common share applicable to common
    stockholders                                                                                                                        |       | $         | 5,960,272 |   |  |      | 0.66  |  
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Weighted average number of shares (from above)                                                                                                                                           |       |           | 7,901,204 |   |  |      |       |  
|                                     | Plus: Weighted average shares of dilutive
    Series D preferred stock using the if-converted method (at
    $8.99 per share) during the period such preferred stock was
    outstanding |       |           | 1,066,634 |   |  |      |       |  
|                                     | Weighted average shares of dilutive Series F
    preferred stock using the if-converted method (at $5.60 per
    share) during the period such preferred stock was outstanding           |       |           | 14,677    |   |  |      |       |  
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                     | Weighted average number of shares                                                                                                                                                        |       |           | 8,982,515 |   |  |      |       |  
|                                     |                                                                                                                                                                                          |       |           |           |   |  |      |      

Stock options to purchase the following number of
shares of common stock at exercise prices per share ranging from
$.23 - $18.69, $.39 - $21.00, and $2.00 - $21.00
in fiscal years ended March 31, 2002, 2001, and 2000,
respectively, were not included in the computation of diluted
earnings per share as their effect would have been antidilutive:

|              |  |      |           |      |  |      |           |  |  |  |           | 
|------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|              |  | 2002 |           | 2001 |  | 2000
|              |  |      |           |      |  |     
|Stock options |  |      | 1,546,166 |      |  |      | 1,430,375 |  |  |  | 1,621,567 | 

The foregoing items were convertible into the
following number of shares of common stock at conversion prices
listed below, were not included in the computation of diluted
earnings per share for the years presented below, as their
effect would have been anti-dilutive:

|                                    |  |      |         |      |  |      |         |  |  |  |           | 
|----------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | --------- | 
|                                    |  | 2002 |         | 2001 |  | 2000
|                                    |  |      |         |      |  |     
|Convertible debentures              |  |      | 555,976 |      |  |      | 556,817 |  |  |  | 614,123   | 
|Series C redeemable preferred stock |  |      | 463,779 |      |  |      | 463,779 |  |  |  | 611,593   | 
|Series D redeemable preferred stock |  |      | N/A     |      |  |      |        |  |  |  | 1,112,347 | 
|Series F redeemable preferred stock |  |      | 378,893 |      |  |      |        |  |  |  | N/A       | 

F-10



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Conversion price per share for the convertible
debentures, Series C, D and F redeemable preferred stock is
$15.86, $16.62, $8.99 and $5.60, respectively.

Derivative
Financial Instruments

Effective April 1, 2001, the Company implemented
the Financial Accounting Standards Boards SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities,as amended by SFAS No. 138, which
establishes accounting and reporting standards for derivatives
and hedging activities. All derivatives must be recorded on the
balance sheet at fair value. Changes in the fair value of
derivatives are accounted for depending upon the exposure being
hedged and the derivatives qualify for and are designated as
hedge accounting. The effect of the adoption did not have a
material impact on the Companys results of operations or
financial position.

New
Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001, and also specifies the criteria that
intangible assets acquired in a business combination must meet
in order to be recognized and reported apart from goodwill.
SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The Company
will adopt the full provisions of SFAS 141 and 142 in the
fiscal year ending March 31, 2003. The Company does not
expect the adoption of SFAS 141 to have a material impact
on the Company. The Company has evaluated the impact of adopting
SFAS 142 and has concluded that its water rights represent
intangible assets which meet the scope of SFAS 142.
Pursuant to SFAS 142, the majority of the Companys
water rights will be amortized in conjunction with the amount of
water that may be used associated with such water rights.

In October 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 applies to all
long-lived assets (including discontinued operations), and
consequently amends APB Opinion No. 30, Reporting the
Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS
No. 144 develops an accounting model for long-lived assets
that are to be disposed of by sale. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value, less cost to
sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest
of the entity, and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS
No. 144 is effective for the Company for all financial
statements issued in Fiscal 2003. The Company will adopt
SFAS 144 in the fiscal year ending March 31, 2003. The
Company does not expect the adoption of SFAS 144 to have a
material impact on the Company.

In May 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. The standard rescinds FASB Statements
No. 4 and 64 that deal with issues relating to the
extinguishment of debt. The standard also rescinds FASB
Statement No. 44 that deals with intangible assets of motor
carriers. The standard modifies SFAS No. 13,
Accounting for Leases, so that certain capital lease
modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, the standard identifies amendments
that should have been made to previously existing pronouncements
and formally amends the appropriate pronouncements. This
statement is

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effective for fiscal years beginning after
May 15, 2002, but early adoption is permitted. The adoption
of SFAS No. 145 will not have a significant effect on the
Companys results of operations or its financial position.

Reclassifications

Certain reclassifications of prior year amounts
have been made in order to conform to the current years
presentation.

Note 2.     Notes
Receivable

Notes receivable arose from the sale of farm
property in Yuba County and San Bernardino County, California.
The notes receivable bear interest at rates ranging from 8% to
9.5%, with a weighted average of 9.0%. The note receivable
maturity dates range from June, 2002 to April, 2009. The notes
are secured by the lots sold.

Aggregate principal maturities due on notes
receivable at March 31, 2002 are as follows:

|                      |  |       |         | 
|--------------------- |  | ----- | ------- | 
|Year Ending March 31, |  | Total
|                      |  |      
|2003                  |  | $     | 50,240  | 
|2004                  |  |       | 6,491   | 
|2005                  |  |       | 7,108   | 
|2006                  |  |       | 109,856 | 
|2007                  |  |       | 6,532   | 
|Thereafter            |  |       | 36,501  | 
|                      |  |       |         | 
|Total                 |  | $     | 216,728 | 
|                      |  |       |         | 

Note 3.     Property
and Equipment

Property and equipment at March 31, 2002 and
2001 consists of the following:

|                              |  |      |          |      |  |  |          |  
|----------------------------- |  | ---- | -------- | ---- |  |  | -------- | -
|                              |  | 2002 |          | 2001
|                              |  |      |          |     
|Land                          |  | $    | 2,952    |      |  |  | 2,952    |  
|Equipment                     |  |      | 227,046  |      |  |  | 214,244  |  
|                              |  |      |          |      |  |  |          |  
|                              |  |      | 229,998  |      |  |  | 217,196  |  
|Less accumulated depreciation |  |      | (178,293 | )    |  |  | (130,922 | )
|                              |  |      |          |      |  |  |          |  
|                              |  | $    | 51,705   |      |  |  | 86,274   |  
|                              |  |      |          |      |  |  |          |  

Note
4.     Land

Land at March 31, 2002 and 2001 consists of
the following:

|                                                |  |      |           |      |  |  |           | 
|----------------------------------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                                                |  | 2002 |           | 2001
|                                                |  |      |           |     
|Cherry Creek Basin, Colorado                    |  | $    | 1,303,177 |      |  |  | 1,299,120 | 
|San Bernardino County, California               |  |      |          |      |  |  | 725,226   | 
|Rice farms and ranches, Yuba County, California |  |      | 2,860,703 |      |  |  | 3,080,490 | 
|                                                |  |      |           |      |  |  |           | 
|                                                |  | $    | 4,163,880 |      |  |  | 5,104,836 | 
|                                                |  |      |           |      |  |  |           | 

At March 31, 2002, the remaining parcels of
land in San Bernardino County, California with a book value of
$553,005 had been reclassified to assets held for sale
(Note 7).

F-12



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5.     Water
Rights

Water rights held at March 31, 2002 and 2001
consist of the following:

|                                                              |  |      |            |      |  |  |            |  
|------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | -
|                                                              |  | 2002 |            | 2001
|                                                              |  |      |            |     
|Cherry Creek Basin, Colorado                                  |  | $    | 10,753,952 |      |  |  | 10,750,442 |  
|Los Angeles County, California                                |  |      | 577,836    |      |  |  | 577,836    |  
|San Bernardino County, California                             |  |      |           |      |  |  | 1,668,153  |  
|Rice farms and ranches, Yuba and Glenn County,
    California |  |      | 280,798    |      |  |  | 280,798    |  
|                                                              |  |      |            |      |  |  |            |  
|                                                              |  |      | 11,612,586 |      |  |  | 13,277,229 |  
|Less: Allowance for project costs                             |  |      | (9,842     | )    |  |  | (9,842     | )
|                                                              |  |      |            |      |  |  |            |  
|                                                              |  | $    | 11,602,744 |      |  |  | 13,267,387 |  
|                                                              |  |      |            |      |  |  |            |  

At March 31, 2002, the remaining water
rights in San Bernardino County, California with a book value of
$1,668,153 had been reclassified to assets held for sale
(Note 7).

During the fiscal year ended March 31, 2001,
the Company abandoned its Olancha project in Inyo County,
California, due to insurmountable local regulatory impediments.
In connection with that abandonment, the Company returned an
associated real property and related water rights to the seller
of the property in exchange for full satisfaction and retirement
of the Companys note in favor of the seller in the amount
of $758,000 and accrued interest of $11,000. The Company also
wrote off the remaining water rights associated with the Olancha
project for which an allowance had been provided in prior years.

During the fiscal year ended March 31, 2001,
the Company sold 1,219 acre-feet of annual groundwater
extraction rights in the Central Basin in Los Angeles,
California to a municipality in the Los Angeles area. The
Company realized a gain on that sale in the amount of $428,225.
The aforementioned gain is included in the gain on sale of water
rights in the accompanying consolidated statement of operations.
During the fiscal year ended March 31, 2001, the Company
also sold 1,000 acre-feet of its water rights in the Mojave
Basin of California to a water utility company, and realized a
gain on that sale in the amount of $464,554.

Note 6.     Prepaid
Leasing Costs

On September 30, 1998, the Company entered
into a pumping rights lease and a water sale agreement with the
City of Inglewood, California (Inglewood). Beginning
October 1, 1998, Inglewood leased the rights to pump 4,450
acre-feet of water per year to the Company for a five-year
period. In consideration of the lease, the Company made a
$3,603,200 lump-sum cash payment to Inglewood. Under the water
sale agreement, the Company agreed to sell, and Inglewood agreed
to buy, 5,950 acre-feet of water each year for the next five
years. In the first year, Inglewood paid $200 per acre-foot
($1,190,000). The per acre-foot price will escalate over the
remaining four-year period at a rate equal to the sum of 3.75%
per year plus 25% of any increase in the Metropolitan Water
District of Southern Californias (MWD) rate
for water, as defined. For the years ended March 31, 2002,
2001 and 2000, the Company recognized revenue of $1,305,809,
$1,286,971, and $1,282,660, respectively from the agreement with
Inglewood.

In order to secure a portion of the water that
the Company agreed to sell to Inglewood, the Company entered
into a five-year and a fifteen-year water rights lease during
the year ended March 31, 1999. The five-year water rights
lease is expected to provide 1,008 acre-feet per year for a
payment of $150 per acre-foot in the first year ($151,200),
which was prepaid, and which had escalated pursuant to the lease
to $173,880 for the year ended March 31, 2002. The
fifteen-year water rights lease is expected to provide 250
acre-feet per year for an annual payment of $135 per acre-foot
($33,750).

F-13



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In February 1999, the Company entered into a
water transfer agreement with Natomas Central Mutual Water
Company (Natomas) pursuant to which Natomas agreed,
subject to certain conditions that have not been satisfied, to
transfer to the Company the temporary use of up to 30,000
acre-feet of non-Central Valley Project water from the
Sacramento River by October 1999. In February 1999, the Company
paid a nonrefundable deposit of $275,000 to Natomas and is
obligated to pay Natomas, upon delivery of the water to a
third-party purchaser, $20 per acre-foot for any of the water
transferred for use within or north of the Delta and $50 per
acre-foot for any of the water transferred for use south of the
Delta. In addition, the Company also agreed to pay Natomas 50%
of the net proceeds, as defined, from the sale of water to a
third-party purchaser. During the year ended March 31,
2000, the State Water Resources Control Board entered its Water
Rights Order 99-012 limiting the amount of water available for
transfer under the Companys agreement with Natomas and
imposing certain restrictions on any such transfer. As a result,
the Company provided an allowance for water project costs of
100% of its investment in this agreement as of March 31,
2000. During the fiscal year ended March 31, 2001 the
Company took delivery of 1,187.7 acre-feet of water under this
agreement and resold a portion of such water to an unaffiliated
water district. Accordingly, the Company reclassified the
proportionate amount of $59,385 of the aforementioned allowance
to cost of water sales. During the fiscal year ended
March 31, 2002, there were no water transfers under this
agreement. Accordingly, there was no adjustment to the
aforementioned allowance to cost of water sales.

During Fiscal 2000, the Company entered into an
arrangement with Sutter Mutual Water Company similar to the
foregoing Natomas arrangement, and paid a nonrefundable deposit
of $100,000, and incurred other costs as well. The Company has
provided an allowance for water project costs of 100% of its
investment in this agreement as of March 31, 2000 because
of the uncertainty regarding its ability to obtain and sell the
water based on the possible application of similar transfer
limitations. During the fiscal year ended March 31,2001 the
Company purchased and resold 1,302 acre-feet of water under this
agreement. Accordingly, the Company reclassified the
proportionate amount of $26,040 of the aforementioned allowance
to cost of water sales. During the fiscal year ended
March 31, 2002, there were no water transfers under this
agreement. Accordingly, there was no adjustment to the
aforementioned allowance to cost of water sales.

As of March 31, 2002, and 2001, the
allowance for prepaid leasing costs was $564,703. Accumulated
amortization as of March 31, 2002, and 2001 was $3,027,085
and $2,253,475, respectively.

Note 7.     Assets
Held for Sale

Assets held for sale are those California segment
assets which are being actively marketed, and which are expected
to be sold within one year. As of March 31, 2002, the
following assets were pending sale:

|                   |  |   |           | 
|------------------ |  | - | --------- | 
|Asset Category:    |  |   |           | 
|Water rights       |  | $ | 1,668,153 | 
|Land               |  |   | 553,005   | 
|Other water assets |  |   | 642,000   | 
|                   |  |   |           | 
|                   |  | $ | 2,863,158 | 
|                   |  |   |           | 

Only the water rights had revenue associated with
them in the fiscal year ended March 31, 2002 in the form of
lease revenue of carryover rights in the amount of $131,000.

Note 8.     Fair
Value of Financial Instruments

Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial
Instruments,requires that the fair values be
disclosed for the Companys financial instruments. The
carrying amount of cash and cash equivalents, accounts
receivable  trade, other current assets, accounts
payable, and

F-14



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accrued expenses and other liabilities are
reasonable estimates of their fair values due to the short-term
nature of those instruments.

The carrying amount of the notes receivable is a
reasonable estimate of fair value based on managements
belief that the terms are not materially different than the
terms that would be offered to land buyers with similar credit
ratings.

The carrying amount of the Bank Loan at its face
value is managements estimate of the Bank Loans fair
value in light of its short remaining term to maturity and the
fact that the Bank Loan has been classified as a current
liability.

The carrying amount of the Debentures is based on
the principal amount owed, and does not represent
managements estimate that the interest rates or terms
represent rates and terms available to the Company in
todays marketplace for similar instruments. Over the past
three fiscal years, the Company has repurchased Debentures in an
unrelated series of voluntary transactions between the Company
and individual Debenture holders at prices ranging from
30 cents to 55 cents per dollar of face amount. At the
times consummated, each of these repurchase transactions
represented fair value of the Debentures. During the fiscal year
ended March 31, 2002, the Company offered to purchase
Debentures at the price of 55 cents per dollar,
managements estimate of fair value of the Debentures at
the time of the offer. However, no Debentures were tendered to
the Company for repurchase at 55 cents per dollar in
response to the latest offer, so the Companys estimate of
then-fair value was not validated by market response. The
Company did not receive any counteroffers to sell Debentures at
any other price. Because there is no quoted market for the
Debentures, estimating fair value is inherently uncertain.

The Company intends to propose Debenture
repurchases in the future at prices that represent
managements estimate of fair value at the time of such
future proposals. In the meantime, because the Company appears
to be the only active bidder for liquidity of the Debentures,
management has estimated the fair value to be the carrying
amount of the Debentures on the principal amount owed, which is
the only objective value currently available to management.

Note 9.     Accrued
Expenses and Other Liabilities

Accrued expenses and other liabilities at
March 31, 2002 and 2001 consist of the following:

|                                                                |  |      |         |      |  |  |         | 
|--------------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                                                |  | 2002 |         | 2001
|                                                                |  |      |         |     
|Professional fees                                               |  | $    | 99,335  |      |  |  | 30,000  | 
|Printing costs                                                  |  |      | 31,944  |      |  |  | 36,000  | 
|Vacation                                                        |  |      | 12,814  |      |  |  | 29,168  | 
|Interest                                                        |  |      | 14,093  |      |  |  | 88,852  | 
|Residual interest  Cucamonga Water Fee
    Agreement (Note 19) |  |      |        |      |  |  | 408,230 | 
|Other                                                           |  |      | 60,697  |      |  |  | 206,732 | 
|                                                                |  |      |         |      |  |  |         | 
|                                                                |  | $    | 218,883 |      |  |  | 798,982 | 
|                                                                |  |      |         |      |  |  |         | 

F-15



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
10.     Long-Term Debt

Long-term debt at March 31, 2002 and 2001
consists of debt related to assets acquired in Cherry Creek
Basin, Colorado, the rice farms and ranches in Yuba and Glenn
County, California, and a ranch in Inyo County, California and
the financing of the lump-sum payment to the City of Inglewood
related to the pumping rights lease (see Note 6):

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      |            |      |  |  |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | --------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 2002 |            | 2001
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      |            |     
|Water leasing program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |      |            |      |  |  |           |  
|Five-year amortizing term loan beginning
    September 30, 1998. The loan accrues interest at the
    banks Reference Rate, as defined, or LIBOR plus 1.5%, and
    is payable quarterly, or sooner, at the Companys option
    (effective rate of 3.375% and 6.9375% as of March 31, 2002
    and 2001, respectively). Principal is payable quarterly, at the
    following annual rate, based on the loan year of October 1
    through September 30: Year 1, $560,000; Year 2,
    $628,000; Year 3, $708,000; Year 4, $790,000;
    Year 5, $874,000 |  | $    | 1,269,000  |      |  |  | 2,018,000 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Cherry Creek Basin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |      |            |      |  |  |           |  
|Mortgage note payable bearing interest at 8%.
    Principal and interest are payable in annual installments of
    $14,307. Balance is due December 2002. At maturity, a balloon
    payment of $47,386 plus any accrued interest is due                                                                                                                                                                                                                                                                                                                   |  |      | 47,386     |      |  |  | 57,123    |  
|Rice farms and ranches                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |      |            |      |  |  |           |  
|Mortgage note payable bearing interest at 9%.
    Principal and interest are payable in annual installments of
    $39,786. Balance is due July 2007                                                                                                                                                                                                                                                                                                                                                                                                       |  |      | 180,275    |      |  |  | 200,243   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      |            |      |  |  |           |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 1,496,661  |      |  |  | 2,275,366 |  
|Less current maturities of long-term obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      | (1,302,460 | )    |  |  | (780,502  | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      |            |      |  |  |           |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $    | 194,201    |      |  |  | 1,494,864 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      |            |      |  |  |           |  

Each of the real estate notes payable above is
collateralized by the related individual property. As of
March 31,2002, the carrying value of the collateral for
notes payable was $939,273.

The Company entered into an interest rate cap
agreement regarding its five-year term loan with a bank. The
notional amount of the interest rate cap agreement is equal to
the outstanding principal balance of the debt. This agreement
limits the Companys exposure to increases in the
banks Reference Rate or LIBOR to 6% per annum. The Company
estimates the fair value of this interest rate cap to be
$0 due to the low current interest rates and the short
amount of time until the related debts maturity.

In connection with five-year amortizing term
loan, the Company agreed to maintain not less than
$15 million of net worth (as defined in the Bank Loan).
During the quarter ended September 30, 2001, the
Companys net worth (as defined) fell below that amount.
Although the breach of the net worth covenant constitutes a
breach under the Bank Loan, the bank has not declared a default
under the loan. In light of the uncured breach in the net worth
covenant, the Company has reclassified the entire loan balance
of $1,269,000 as a component of current maturities of long-term
debt at March 31, 2002.

Amortization expense on the deferred debt costs
totaled $16,980 for the years ended March 31, 2002, 2001
and 2000. Accumulated amortization as of March 31, 2002,
and 2001 was $59,430 and $42,450, respectively.

F-16



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the year ended March 31, 2000, the
Company purchased a ranch in Inyo County, California. As partial
consideration, it gave a mortgage note payable of $800,000.
Certain personal property assets acquired with the land were
sold, and the proceeds of $42,000 were used to reduce the
balance of the note to $758,000 at March 31, 2000. In
February, 2001, the Company returned the ranch property to the
seller/payee of the aforementioned note payable in full
satisfaction of the note and related accrued interest (Note 6).

Aggregate principal maturities on long-term debt
at March 31, 2002 are as follows:

|                       |  |   |           | 
|---------------------- |  | - | --------- | 
|Years ending March 31, |  |   |           | 
|2003                   |  | $ | 1,302,460 | 
|2004                   |  |   | 37,215    | 
|2005                   |  |   | 40,452    | 
|2006                   |  |   | 43,969    | 
|2007                   |  |   | 33,487    | 
|Thereafter             |  |   | 39,078    | 
|                       |  |   |           | 
|Total                  |  | $ | 1,496,661 | 
|                       |  |   |           | 

Note 11.     9%
Convertible Subordinated Debentures

On September 22, 1995 the Company issued
$15,000,000 of 9% Convertible Subordinated Debentures (the
Debentures), due in September, 2005. The Debentures
are unsecured and subordinate to all secured debt. Interest
accrues at 9% per annum and is payable on September 30 and
March 31 of each year.

The Debentures are initially convertible into
shares of the Companys common stock at a conversion price
of $15.86 per share (after the effect of the March 28, 1996
stock dividend). Effective October 1, 1997, the Company may
redeem the Debentures at a cash redemption price equal to 100%
of the principal amount redeemed (plus accrued and unpaid
interest thereon) if the trading price of the common stock was
150% of the conversion price for the 20 preceding trading days.
During the year ended March 31, 2002, the Company
repurchased $13,334 of its outstanding 9% Debentures, for $7,409
in cash. During the year ended March 31, 2001, the Company
repurchased $908,888 of its outstanding 9% Debentures, plus
accrued interest of $13,714, for $499,888 in cash. After
reducing related deferred debt costs of $49,617, net of
accumulated amortization of $26,094, the Company recognized a
$385,477 extraordinary gain on the extinguishment of debt.
During the year ended March 31, 2000, the Company
repurchased $5,000,000 of the Debentures plus accrued interest
of $157,808 for $1,500,000 in cash. After reducing related
deferred debt costs of $272,956, net of accumulated amortization
of $104,951, the Company recognized a $3,489,803 extraordinary
gain on the extinguishment of debt. As a result of this
transaction, gross deferred debt costs and accumulated
amortization were reduced by $272,956 and $89,287, respectively.
Amortization expense on the deferred debt costs was $48,211,
$53,071 and $62,659 for the years ended March 31, 2002,
2001 and 2000. Accumulated amortization as of March 31,
2002 and 2001 was $315,014 and $266,803, respectively.

Note
12.     Preferred Stock

On April 21, 1997, the Company issued 5,000
shares of Series C Convertible Redeemable Preferred Stock
(Series C Preferred Stock) through a private
offering. The Company received $5,000,000 in cash and incurred
$255,212 of placement costs. The Series C Preferred Stock
was recorded at fair value on the date of issuance less issue
costs. The excess of the preference value over the carrying
value of $447,695 is being accreted by periodic charges to
accumulated deficit until the redemption date in April 2007.
Each share of Series C Preferred Stock has a stated value
of $1,000, a par value of $.001, and is convertible at any time
at the option of the holder into shares of common stock at a
conversion price of $16.62 per share. The conversion

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

price, and therefore the number of shares of
common stock issuable upon the conversion of the Series C
Preferred Stock, is subject to adjustment in certain events to
prevent dilution.

The holders of Series C Preferred Stock are
entitled to vote on all matters presented to the stockholders,
together with the holders of common stock as one class, except
as otherwise required by law. Each share of Series C
Preferred Stock is entitled to the number of votes equal to the
number of shares of common stock into which such share of
Series C Preferred Stock would have been convertible, if
such conversion had taken place on the record date set for
determining stockholders entitled to vote at a meeting or the
date of the consent of stockholders if action is being taken by
written consent. The holders of Series C Preferred Stock
are entitled to receive, when, and if declared, annual dividends
in the amount of $72.50 per share, payable semi-annually on
January 15 and July 15 of each year. The Company
deferred payment of the cash dividend due on January 15,
2001 pending discussions with the holders of the Series C
Preferred Stock related to a possible restructuring. On
June 18, 2001, the Company declared the January 15,
2001 dividend, and, based on mutual agreement with the holders
of the Series C Preferred Stock, terminated restructuring
discussions. During the fiscal years ended March 31, 2002,
2001 and 2000, the Company paid cash dividends of $838,286,
$368,477 and $736,954, respectively, on the Series C
Preferred Stock.

In the event that the Company is in default in
the payment of two or more semi-annual dividends, the holders of
the Series C Preferred Stock would have the right, voting
as a class, to elect a majority of the directors of the Company,
and the holders of the common stock would have the right to
elect the remaining directors. The right of the holders to elect
a majority of the directors of the Company would continue until
dividends are paid for at least two consecutive semi-annual
periods, after which the right to elect directors shall revert
to the common stock and the Series C Preferred Stock,
voting as a single class. The Company may, upon
30 days written notice to the holders, redeem all or
any portion of the Series C Preferred Stock at any time
after April l, 1999 at a cash redemption price of $1,000 per
share plus accrued but unpaid dividends. However, the Company
may redeem the Series C Preferred Stock only if the average
closing price of the common stock during the 20 consecutive
trading days prior to the notice of redemption is not less than
150% of the conversion price (initially $16.62 per share,
subject to adjustment).

Commencing on April 1, 2006 and continuing
until March 31, 2007, each holder of shares of the
Series C Preferred Stock may, from time to time during such
period, at such holders option, cause the Company to
redeem for cash, out of funds legally available, up to an
aggregate of one-half of all shares of Series C Preferred
Stock owned by such holder on April 1, 2006. Commencing on
April 1, 2007, each holder of shares of Series C
Preferred Stock may, from time to time thereafter, at such
holders option, cause the Company to redeem for cash, out
of funds legally available, some or all of such holders
shares of Series C Preferred Stock. The redemption price
for each share of Series C Preferred Stock shall be $1,000
per share, plus, in each case, all declared and unpaid
dividends, if any.

The Series C Preferred Stock has a
preference in liquidation over the holders of common stock of
$1,000 per share plus accrued and unpaid dividends.

During the fiscal year ended March 31, 2001,
the Company voluntarily purchased 2,456.5124 shares of its
Series C Preferred Stock at a purchase price of $180 per
share for a total purchase consideration of $442,171. The net
carrying value of such shares was $2,376,911 net of related
private placement costs of $79,600. The excess of the
Series C Preferred Stock net carrying value over the
consideration paid by the Company was $1,934,740 and has been
credited to accumulated deficit in the accompanying consolidated
financial statements. Solely for earnings per share purposes,
such excess has been included in the computation of earnings
applicable to common stockholders. The carrying amount of the
Series C Preferred Stock is based on the liquidation
preference accorded such stock and on the Companys
obligation to redeem such stock for cash at the liquidation
value at a future date certain, and does not represent
managements belief that the interest rates, conversion
price and other terms of such stock are comparable to those
commercially available to the Company in the marketplace for
similar instruments.

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On October 27, 1998, the Company sold
$10,000,000 of its Series D Convertible Redeemable
Preferred Stock (Series D Preferred Stock) to
Interagua, Servicios Intregrales del Agua, S. A.
(Interagua), an affiliate of Sociedad General de
Aguas de Barcelona, S. A. (Agbar). Each share of
Series D Preferred Stock had a stated value of $1,000, had
a dividend rate of 7.5% of its stated value, and was convertible
at any time at the option of the holder into the number of
shares of common stock determined by dividing the amount of the
liquidation preference on the conversion date by the conversion
price of such shares in effect on the conversion date. The
conversion price was $8.99 per share (the Conversion
Price) and was subject to adjustment in certain events to
prevent dilution.

During the years ended March 31, 2001 and
2000, the Company paid cash dividends of $375,000 and $750,000,
respectively, on the Series D Preferred Stock.

On March 16, 2001, the Company entered into
an Investment Restructure Agreement (the Agreement)
with Agbar and its affiliate for the early redemption and
retirement of the entire $10,000,000 of issued and outstanding
Series D Preferred Stock. In consideration of that
redemption and retirement, the Company (1) declared and
paid to Interagua the December 15, 2000 scheduled dividend
of $187,500; (2) returned to Interagua the remaining
restricted cash balance (after giving effect to the reduction of
such balance resulting from the aforementioned dividend) of
$3,853,643; (3) issued 175,000 unregistered shares of the
Companys Common Stock to Interagua; and (4) issued to
Interagua 2,000 shares of its newly authorized Series F
Convertible Redeemable Preferred Stock, which shares of
preferred stock have an aggregate stated value of $2,000,000
with a fair value of $364,000, based upon an independent
third-party valuation. In addition, under the Agreement, the
Strategic Relationship Agreement (SRA) was
cancelled, and the parties thereto agreed to consider
cooperating in the potential joint development of future water
infrastructure and water utility projects. Also, with the
cancellation of the SRA, Interagua no longer has the right to
appoint Directors to the Board of the Company.

The excess of the Series D Preferred Stock
carrying value over fair value of the consideration paid by the
Company to retire the Series D Preferred Stock was
$5,743,857 and has been credited to accumulated deficit in the
accompanying consolidated financial statements. Solely for
earnings per share purposes, such excess has been included in
the computation of earnings applicable to common stockholders.
The carrying amount of the Series D Preferred Stock is
based on the liquidation preference accorded such stock and on
the Companys obligation to redeem such stock for cash at
the liquidation value at a future date certain, and does not
represent managements belief that the interest rates,
conversion price and other terms of such stock are comparable to
those commercially available to the Company in the marketplace
for similar instruments.

As described in the Certificate of Designations
for the Series F Convertible Redeemable Preferred Stock
(Series F Preferred Stock), each share of
Series F Preferred Stock has a stated value of $1,000, a
dividend rate of 6.0% per annum of its stated value, and is
convertible at any time at the option of the holder into the
number of shares of common stock determined by dividing the
amount of the stated value of the shares of Series F
Preferred Stock by the conversion price of such shares in effect
on the conversion date. The conversion price is initially $5.60
per share and is subject to adjustment in certain events to
prevent dilution. Dividends shall be fully cumulative, and shall
be paid semi-annually in arrears, out of funds legally available
for the payment of dividends, on January 15 and
July 15 of each year. Dividends may be paid in additional
shares of Series F Preferred Stock, or in cash, at the
Companys option. During the year ended March 31,
2002, the Company declared and issued 120 additional shares of
Series F preferred Stock in satisfaction of these dividend
requirements. The Series F Preferred Stock is subject to
full redemption at its stated value plus accrued dividends, at
the option of the holder, from cash of the Company legally
available for such purpose, beginning in fiscal year 2011, or
earlier, at the option of the Company, subject to certain
conditions being met.

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13.     Treasury
Stock

In November 1998, the Companys Board of
Directors authorized the repurchase of up to 500,000 shares of
the Companys common stock in the open market. As of
March 31, 2002 and 2001, the Company had repurchased
341,200 shares of common stock at a cost of $1,374,870. The
purchase of treasury shares was recorded using the cost method.

Note 14.     Income
Taxes

Total income taxes for the years ended
March 31, 2002, 2001 and 2000, were allocated to continuing
operations. Income tax expense attributable to income
(loss) from continuing operations consists of:

|                                  |  |         |       |          |  |       |   |  |  |   |       | 
|--------------------------------- |  | ------- | ----- | -------- |  | ----- | - |  |  | - | ----- | 
|                                  |  | Current |       | Deferred |  | Total
|                                  |  |         |       |          |  |      
|Year ended March 31, 2002 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|Year ended March 31, 2001 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|Year ended March 31, 2000 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 

Income tax expense attributable to net income
(loss) from continuing operations was $3,200 for each of
the years ended March 31, 2002, 2001, and 2000,
respectively, and differed from the amounts computed by applying
the effective combined U.S. federal and state income tax rate of
40% to pretax net income (loss) from continuing operations
as a result of the following:

|                                                     |  |      |            |      |  |      |          |   |  |  |            |  
|---------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | -------- | - |  |  | ---------- | -
|                                                     |  | 2002 |            | 2001 |  | 2000
|                                                     |  |      |            |      |  |     
|Computed expected income tax expense
    (benefit) |  | $    | (1,312,000 | )    |  |      | (526,000 | ) |  |  | (1,274,000 | )
|Permanent differences, tax effected                  |  |      | 115,000    |      |  |      | 114,000  |   |  |  | 105,000    |  
|Valuation allowance on NOL carry-forward             |  |      | 1,197,000  |      |  |      | 412,000  |   |  |  | 1,169,000  |  
|State income taxes                                   |  |      | 3,200      |      |  |      | 3,200    |   |  |  | 3,200      |  
|                                                     |  |      |            |      |  |      |          |   |  |  |            |  
|                                                     |  | $    | 3,200      |      |  |      | 3,200    |   |  |  | 3,200      |  
|                                                     |  |      |            |      |  |      |          |   |  |  |            |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities at March 31, 2002 and 2001 are
presented below.

|                     |                                                                                                                  |                        |   |             |   |  |  |             |   | 
|-------------------- | ---------------------------------------------------------------------------------------------------------------- | ---------------------- | - | ----------- | - |  |  | ----------- | - | 
|                     |                                                                                                                  | 2002                   |   | 2001       
|                     |                                                                                                                  |                        |   |            
|Deferred tax assets: |                                                                                                                  |                        |   |             |   |  |  |            
|                     | Allowance for water projects                                                                                     |                        | $ | 230,000     |   |  |  | 262,000     |  
|                     | Property and equipment                                                                                           |                        |   | 38,000      |   |  |  | 54,000      |  
|                     | Deferred revenue                                                                                                 |                        |   | 77,000      |   |  |  | 77,000      |  
|                     | Net operating loss carry-forwards                                                                                |                        |   | 11,344,000  |   |  |  | 10,583,000  |  
|                     |                                                                                                                  |                        |   |             |   |  |  |            
|                     | Total gross deferred tax assets                                                                                  |                        |   | 11,689,000  |   |  |  | 10,976,000  |  
|                     | Less valuation allowance                                                                                         |                        |   | (11,340,000 | ) |  |  | (10,625,000 | )
|                     |                                                                                                                  |                        |   |             |   |  |  |            
|                     | Net deferred tax assets                                                                                          |                        |   | 349,000     |   |  |  | 351,000     |  
|                     |                                                                                                                  |                        |   |             |   |  |  |            
|                     | Deferred tax liabilities  land and
    water rights, principally due to differences in capitalized
    interest |                        |   | (349,000    | ) |  |  | (351,000    | )
|                     |                                                                                                                  |                        |   |             |   |  |  |            
|                     |                                                                                                                  | Net deferred tax asset |   | $           |  |  |  |             |  | 
|                     |                                                                                                                  |                        |   |             |   |  |  |            

The net change in the total valuation allowance
for the years ended March 31, 2002 and 2001 was an increase
of $715,000 and $375,000, respectively, which is primarily due
to current year additions to net operating loss carryforwards of
$1,197,000 and $412,000 respectively, and partially offset by
the write-off of

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

net operating loss carryforwards which expired
unused of $462,000 and $0, respectively. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in
making this assessment. During the years ended March 31,
2002, 2001 and 2000, the valuation allowance was increased as a
result of the current years net operating loss
carry-forward.

Based upon the level of historical taxable income
and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of
these deductible differences, net of the existing valuation
allowances at March 31, 2002 and 2001. The amount of the
deferred tax asset considered realizable, however, could be
adjusted in the near term if estimates of future taxable income
during the carry-forward period change.

At March 31, 2002, the Company has net
operating loss carry-forwards for federal income tax purposes
which are available to offset future federal taxable income, if
any, as follows:

|     |  |   |            | 
|---- |  | - | ---------- | 
|2004 |  | $ | 900,000    | 
|2005 |  |   | 400,000    | 
|2006 |  |   | 2,000,000  | 
|2007 |  |   | 1,600,000  | 
|2008 |  |   | 1,800,000  | 
|2009 |  |   | 400,000    | 
|2010 |  |   | 1,300,000  | 
|2011 |  |   | 1,800,000  | 
|2012 |  |   | 4,900,000  | 
|2018 |  |   | 2,400,000  | 
|2019 |  |   | 4,800,000  | 
|2020 |  |   | 3,000,000  | 
|2021 |  |   | 2,600,000  | 
|2022 |  |   | 3,000,000  | 
|     |  |   |            | 
|     |  | $ | 30,900,000 | 
|     |  |   |            | 

Note
15.     Impairment of Long-Lived
Assets

During the year ended March 31, 2002, there
were no impairment charges deemed necessary.

During the year ended March 31, 2001, based
upon a review of the value of such assets, the Company recorded
a non-cash impairment of land of $318,000 and an impairment of
water rights of $445,000, all associated with the Olancha
Project. These impairments were to reduce the recorded asset
values of these assets held by the Company to zero, which
represented the consideration received upon returning such
assets to the seller in exchange for full satisfaction and
retirement of the Companys note in favor of the seller in
the amount of $758,000 (Note 5).

During the year ended March 31, 2000, based
on a comprehensive review of the Companys water rights and
other assets, the Company recorded a non-cash impairment of
water rights of $826,618, and an impairment of other water
assets of $339,364. These impairments were to reduce the
recorded asset values of certain water rights held by the
Company in San Bernardino County, California, and certain other
water-related assets to their estimated fair market value.

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
16.     Quasi-Reorganization

The Companys Board of Directors authorized
management to effect a quasi-reorganization as of
October 1, 1994. Such reorganization was ratified by the
Companys stockholders in March 1995, and accordingly, the
assets and liabilities at that time were restated to their
current values as of the date of the reorganization. The amount
of increases, however, is limited to the amount of decreases in
other assets. In this regard, effective October 1, 1994 the
Company recognized a write-down in the value of the silica plant
of $1,830,914, which was subsequently sold. This write-down was
offset by a corresponding write-up of a like amount which was
allocated proportionately, based on the relative excess of fair
market value of each asset over historic book basis, to land
held for sale of $454,604, to water rights of $1,038,268, and to
other water assets of $338,042. Further, the accumulated deficit
of $14,405,252, most of which was due to the Companys
prior and now discontinued operation, was eliminated by a
corresponding decrease in the Companys additional paid-in
capital. Accumulated deficit is dated to reflect only results of
operations subsequent to October 1, 1994. Any future tax
benefits from deductible temporary differences and net operating
loss carry-forwards that existed at the date of the
quasi-reorganization will be reported as a direct credit to
paid-in capital.

Note 17.     Stock
Options and Warrants

Under the Companys 1997 and 1993 stock
option plans (the Plans), the Company may grant
options to purchase up to 2,200,000 shares of common stock to
officers, directors, key employees and others providing
significant services to the Company. The Companys 1990
stock option plan, which provided for the grant of up to 800,000
options, terminated during the fiscal year ended March 31,
2001. Stock options are generally granted at an exercise price
no less than fair value of the Companys common stock on
the date of grant. There were 653,834 options available to be
granted at March 31, 2002.

The per share weighted-average fair value of
stock options granted during the years ended March 31,
2002, 2001, and 2000 was $.46, $.26, and $2.40, respectively, on
the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: Year ended
March 31, 2002  Expected dividend yield of zero,
expected volatility of .9875, risk-free interest rate of 4.47%,
and an expected life of 5 years. Year ended March 31,
2001  Expected dividend yield of zero, expected
volatility of .7517, risk-free interest rate of 5.97%, and an
expected life of 5 years. Year ended March 31,
2000  Expected dividend yield of zero, expected
volatility of .8319, risk-free interest rates ranging from 4.70%
to 5.68%, and an expected life of 5 years.

The Company applies APB Opinion No. 25 and
all related interpretations in accounting for options granted to
its employees and directors under its Plans and, accordingly, in
Fiscal 2002, 2001, and 2000, compensation expenses of $154,260,
$0, and $101,284, respectively, have been recognized in
conjunction with the vesting of stock options. Had the Company
determined compensation expense based on the fair value at the
grant date for

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

its stock options under SFAS No. 123, the
Companys net loss and basic and diluted loss per share
applicable to common stockholders would have been increased to
the pro forma amounts indicated below:

|                                                         |             |      |   |            |   |      |  |           |  |  |  |            |  
|-------------------------------------------------------- | ----------- | ---- | - | ---------- | - | ---- |  | --------- |  |  |  | ---------- | -
|                                                         |             | 2002 |   | 2001       |   | 2000
|                                                         |             |      |   |            |   |     
|Net income (loss) applicable to common
    stockholders: |             |      |   |            |   |      |  |           |  |  |  |           
|                                                         | As reported |      | $ | (4,249,145 | ) |      |  | 5,394,863 |  |  |  | (4,708,076 | )
|                                                         | Pro forma   |      |   | (4,217,333 | ) |      |  | 5,338,867 |  |  |  | (6,460,011 | )
|Basic income (loss) per common share:                    |             |      |   |            |   |      |  |           |  |  |  |           
|                                                         | As reported |      | $ | (.53       | ) |      |  | .68       |  |  |  | (.59       | )
|                                                         | Pro forma   |      |   | (.52       | ) |      |  | .68       |  |  |  | (.82       | )
|Diluted income (loss) per common share:                  |             |      |   |            |   |      |  |           |  |  |  |           
|                                                         | As reported |      |   | (.53       | ) |      |  | .66       |  |  |  | (.59       | )
|                                                         | Pro forma   |      |   | (.52       | ) |      |  | .66       |  |  |  | (.82       | )

Stock option activity during the periods
indicated is as follows:

|                          |                             |                  |           |                  |   |  |       |       | 
|------------------------- | --------------------------- | ---------------- | --------- | ---------------- | - |  | ----- | ----- | 
|                          |                             |                  |           | Weighted-Average
|                          |                             | Number of Shares |           | Exercise Price  
|                          |                             |                  |           |                 
|Balance at March 31, 1999 |                             |                  | 1,689,876 |                  |   |  | 13.71 |      
|                          | Granted                     |                  |           | 368,500          |   |  |       | 5.37  | 
|                          | Exercised                   |                  |           |                 |   |  |       |      | 
|                          | Cancelled/forfeited/expired |                  |           | (436,809         | ) |  |       | 10.85 | 
|                          |                             |                  |           |                  |   |  |       |      
|Balance at March 31, 2000 |                             |                  | 1,621,567 |                  |   |  | 12.58 |      
|                          |                             |                  |           |                  |   |  |       |      
|                          | Granted                     |                  |           | 1,081,000        |   |  |       | .39   | 
|                          | Exercised                   |                  |           |                 |   |  |       |      | 
|                          | Cancelled/forfeited/expired |                  |           | (1,272,192       | ) |  |       | 12.75 | 
|                          |                             |                  |           |                  |   |  |       |      
|Balance at March 31, 2001 |                             |                  | 1,430,375 |                  |   |  | 3.17  |      
|                          |                             |                  |           |                  |   |  |       |      
|                          | Granted                     |                  |           | 188,500          |   |  |       | .59   | 
|                          | Exercised                   |                  |           |                 |   |  |       |      | 
|                          | Cancelled/forfeited/expired |                  |           | (72,709          | ) |  |       | 10.70 | 
|                          |                             |                  |           |                  |   |  |       |      
|Balance at March 31, 2002 |                             |                  | 1,546,166 |                  |   |  | 2.55  |      
|                          |                             |                  |           |                  |   |  |       |      

The following table summarizes information about
stock options outstanding at March 31, 2002:

|                        |        |             |           |                  |  |                  |     |             |  |                |       |      |  |  |         |         |  |   |       |      | 
|----------------------- | ------ | ----------- | --------- | ---------------- |  | ---------------- | --- | ----------- |  | -------------- | ----- | ---- |  |  | ------- | ------- |  | - | ----- | ---- | 
|                        |        |             |           | Weighted         |  |                  |     |             |  | Weighted      
|                        |        |             |           | Average          |  |                  |     |             |  | Average       
|                        |        | Number of   |           | Remaining        |  | Weighted         |     | Number of   |  | Exercise Price
|                        |        | Options     |           | Contractual Life |  | Average Exercise |     | Options     |  | of Exercisable
|Range of Exercise Price |        | Outstanding |           | (Years)          |  | Price            |     | Exercisable |  | Options       
|                        |        |             |           |                  |  |                  |     |             |  |               
|$  .23 - .68            |        |             | 1,219,500 |                  |  |                  | 8.9 |             |  | $              | .42   |      |  |  | 347,000 |         |  | $ | .39   |     
|4.00 - 5.44             |        |             | 80,000    |                  |  |                  | 1.1 |             |  |                | 4.81  |      |  |  | 80,000  |         |  |   | 4.81  |     
|9.50 - 12.06            |        |             | 130,000   |                  |  |                  | 1.2 |             |  |                | 10.50 |      |  |  | 130,000 |         |  |   | 10.50 |     
|13.50 - 14.50           |        |             | 90,000    |                  |  |                  | 1.6 |             |  |                | 13.67 |      |  |  | 90,000  |         |  |   | 13.67 |     
|15.88 - 18.70           |        |             | 26,666    |                  |  |                  | 2.3 |             |  |                | 16.58 |      |  |  | 26,666  |         |  |   | 16.58 |     
|                        |        |             |           |                  |  |                  |     |             |  |                |       |      |  |  |         |         |  |   |       |     
|                        | Totals |             |           | 1,546,166        |  |                  |     | 3.0         |  |                | $     | 2.55 |  |  |         | 673,666 |  |   | $     | 5.29 | 
|                        |        |             |           |                  |  |                  |     |             |  |                |       |      |  |  |         |         |  |   |       |     

F-23



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At March 31, 2001 and 2000, the number of
options exercisable was 389,375 and 685,309, respectively, and
the weighted-average exercise price of those options was $10.59
and $12.58, respectively.

During the fiscal year ended March 31, 2001
the exercise price of options to purchase 600,000 shares of
common stock was lowered to the then current market price of the
Companys common stock. This modification of the exercise
price requires the modified stock options to be accounted for
following variable plan accounting until such options are
exercised, cancelled, or expire unexercised. For fiscal years
ended March 31, 2002 and 2001, compensation expense
associated with these options totaled $154,260 and $0,
respectively.

Note
18.     Extraordinary Income

During the fiscal year ended March 31, 2001,
the Company abandoned its Olancha project in Inyo County,
California, due to insurmountable local regulatory impediments.
In connection with that abandonment, the Company returned the
associated real property to the seller of the property in
exchange for full satisfaction and retirement of the
Companys note in favor of the seller in the amount of
$758,000 and accrued interest of $10,617 (Note 10), and
recognized an extraordinary gain on extinguishment of debt, net
of income taxes, of $768,617.

During the year ended March 31, 2001, the
Company repurchased $908,888 of its outstanding 9% Debentures,
plus accrued interest of $13,714, for $513,602 in cash. After
reducing related deferred debt costs of $49,617, net of
accumulated amortization of $26,094, the Company recognized a
$385,477 extraordinary gain on the early extinguishment of debt.

During the year ended March 31, 2000, the
Company repurchased $5,000,000 of its 9% Convertible
Subordinated Debentures plus accrued interest of $157,808, for
$1,500,000. After reducing related deferred debt costs of
$272,956, net of accumulated amortization of $104,951, the
Company recognized an extraordinary gain on extinguishment of
debt, net of income taxes, of $3,489,803.

Note 19.     Other
Income

The Company previously owned a right to receive
3.7398% of the gross payments made by the Cucamonga County Water
District (CCWD), located in San Bernardino County,
California, in connection with certain water sold or made
available to CCWD by the Fontana Union Water Company, a mutual
water company principally owned by Kaiser Ventures, Inc.
(KVI), under a 100-year lease. In March, 2001 KVI
completed the sale of its interest in the Fontana Union Water
Company to CCWD. As a result of the sale, the Company became
entitled to 3.7398% of the net sales proceeds to KVI, after
certain offsets for KVIs transaction expenses. On
March 23, 2001, the Company received net proceeds from the
sale, realizing a gain of $879,208, after providing for
transaction costs and a residual interest due to an unrelated
third party.

In March 2000, the company sold 714.5 shares of
the Fontana Mutual Water Company, and realized a gain on the
sale in the amount of $394,745.

F-24



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 20.     General
and Administrative

General and administrative expenses for the years
ended March 31, 2002, 2001 and 2000 consist of the
following:

|                                                |  |      |           |      |  |      |           |   |  |   |           | 
|----------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                                                |  | 2002 |           | 2001 |  | 2000
|                                                |  |      |           |      |  |     
|Payroll and related costs                       |  | $    | 1,621,838 |      |  |      | 1,461,091 |   |  | $ | 2,242,856 | 
|Legal and accounting                            |  |      | 333,453   |      |  |      | 331,435   |   |  |   | 425,112   | 
|Consulting and engineering                      |  |      | 340,621   |      |  |      | 675,724   |   |  |   | 1,454,902 | 
|Travel                                          |  |      | 99,093    |      |  |      | 97,613    |   |  |   | 220,380   | 
|(Recovery of) allowance for water project costs |  |      |          |      |  |      | (85,425   | ) |  |   | 1,018,717 | 
|Impairment of assets                            |  |      |          |      |  |      | 762,770   |   |  |   | 1,165,982 | 
|Other corporate expenses                        |  |      | 680,605   |      |  |      | 690,787   |   |  |   | 920,666   | 
|                                                |  |      |           |      |  |      |           |   |  |   |           | 
|                                                |  | $    | 3,075,610 |      |  |      | 3,933,995 |   |  | $ | 7,448,615 | 
|                                                |  |      |           |      |  |      |           |   |  |   |           | 

Note 21.     Employee
Benefit Plan

The Company has a 401(k) Plan for all employees.
Employer contributions by the Company are discretionary. In the
three most recent fiscal years, the Company has matched a
percentage of the contributions of participating employees.
Company matching contributions for the years ended
March 31, 2002, 2001 and 2000 amounted to $10,000, $7,197,
and $16,194, respectively.

Note 22.     Segment
Information

The Company has previously reported its
continuing operations in two segments, water rights and real
estate. Upon the purchase of assets that contain both real
estate and water rights, the basis of such assets has been
allocated to real estate and water rights based on the relative
fair market values of the components at the time of acquisition.
As properties or water rights were sold, the allocated portion
of the basis was included in cost of revenue.

Beginning with the fiscal year ended
March 31, 2002, the Company has re-aligned its segment
reporting into two operating segments, California and Colorado.
The reasons for this change include the following:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Beginning in the fourth quarter of fiscal year
    ended March 31, 2002, management began reporting operating
    results by geographic region to the chief operating decision
    maker.                 
|
| |  | The Cherry Creek Project assets represent an
    integrated, stand-alone, water development project distinct from
    the California assets and operations of the Company.                                
|
| |  | California and Colorado are significantly
    different environments from the standpoint of water law, policy
    and regulation.                                                                         
|
| |  | Subject to shareholder approval, it is the
    Companys intention to move the Cherry Creek Project assets
    and operations into a wholly-owned subsidiary.                                             
|
| |  | Separately showing the California and Colorado
    assets and operations on a segment basis will enhance the
    readers understanding of the Companys financial
    position and results of operations.

F-25



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The segment information for the fiscal years
ended March 31, 2001 and 2000 have been restated to reflect
the new segment structure.

|                                       |             |      |            |            |   |      |            |            |   |  |            |            |  
|-------------------------------------- | ----------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                       |             | 2002 |            | 2001       |   | 2000
|                                       |             |      |            |            |   |     
|Segment revenue:                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      | $          | 1,464,200  |   |      |            | 2,126,695  |   |  |            | 2,796,037  |  
|                                       | Colorado    |      |            |           |   |      |            |           |   |  |            |           |  
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             |      | 1,464,200  |            |   |      | 2,126,695  |            |   |  | 2,796,037  |           
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|Net operating income (loss):           |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      |            | (571,515   | ) |      |            | (743,888   | ) |  |            | (142,460   | )
|                                       | Colorado    |      |            |           |   |      |            |           |   |  |            |           |  
|                                       | Non-segment |      |            | (2,708,879 | ) |      |            | (570,614   | ) |  |            | (3,042,843 | )
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             |      | (3,280,394 | )          |   |      | (1,314,502 | )          |   |  | (3,185,303 | )         
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|Interest income:                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      |            |           |   |      |            |           |   |  |            |           |  
|                                       | Colorado    |      |            |           |   |      |            |           |   |  |            |           |  
|                                       | Non-segment |      |            | 170,006    |   |      |            | 478,204    |   |  |            | 622,239    |  
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             |      | 170,006    |            |   |      | 478,204    |            |   |  | 622,239    |           
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|Interest expense:                      |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      |            | 83,952     |   |      |            | 289,536    |   |  |            | 211,396    |  
|                                       | Colorado    |      |            |           |   |      |            |           |   |  |            |           |  
|                                       | Non-segment |      |            | 775,747    |   |      |            | 849,413    |   |  |            | 1,035,809  |  
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             |      | 859,699    |            |   |      | 1,138,949  |            |   |  | 1,247,205  |           
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|Depreciation and amortization expense: |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      |            | 970,452    |   |      |            | 1,063,437  |   |  |            | 959,387    |  
|                                       | Colorado    |      |            |           |   |      |            |           |   |  |            |           |  
|                                       | Non-segment |      |            | 62,709     |   |      |            | 172,690    |   |  |            | 137,959    |  
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             |      | 1,033,161  |            |   |      | 1,236,127  |            |   |  | 1,097,346  |           
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|Assets:                                |             |      |            |            |   |      |            |            |   |  |            |           
|                                       | California  |      |            | 8,282,294  |   |      |            | 9,415,509  |   |  |            |            |  
|                                       | Colorado    |      |            | 12,057,131 |   |      |            | 12,049,564 |   |  |            |            |  
|                                       | Non-segment |      |            | 3,885,466  |   |      |            | 8,181,234  |   |  |            |            |  
|                                       |             |      |            |            |   |      |            |            |   |  |            |           
|                                       |             | $    | 24,224,891 |            |   |      | 29,646,307 |            |   |  |            |           
|                                       |             |      |            |            |   |      |            |            |   |  |            |           

For the years ended March 31, 2002, 2001 and
2000, the Company recognized revenue of $1,305,809, $1,286,971,
and $1,282,660, respectively, from the City of Inglewood. No
other recurring customer accounted for more than 10% of the
Companys revenue.

The results are determined based on the
Companys management accounting process, which assigns
balance sheet and income statement items to each responsible
operating segment. This process is dynamic and somewhat
subjective. Unlike financial accounting, there is no
comprehensive, authoritative guidance for management accounting
equivalent to generally accepted accounting principles. The
management accounting process measures the performance of the
operating segments based upon the Companys management
structure and is not necessarily comparable with similar
information for other companies. Management uses

F-26



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the same reporting criteria for measurements of
the reportable segments profits or losses and assets as
used for the Companys consolidated financial statements.

The non-segment amount under net operating income
(loss) includes interest income, general and administrative
expenses and extraordinary income from extinguishment of debt
(net). The non-segment amount under depreciation and
amortization includes depreciation of the non-segment equipment,
and amortization of debt issuance costs. The non-segment amount
under assets includes cash and cash equivalents, and equipment
not otherwise allocated to a segment, and other assets.

Note
23.     Commitments and
Contingencies

The Company has several non-cancelable office
equipment, office space and farmland operating leases that
expire over the next four years. These leases generally contain
renewal options for periods ranging from three to five years and
require the Company to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases
was $121,070, $74,341, and $163,034 for the years ended
March 31, 2002, 2001 and 2000, respectively.

In addition, the Company entered into a pumping
rights lease and a water sale agreement with the City of
Inglewood in September 1998. In order to secure a portion of the
water that the Company agreed to sell to Inglewood, the Company
entered into a five-year and a fifteen-year water rights lease.
The five-year water rights lease is expected to provide 1,008
acre-feet per year for a payment of $150 per acre-foot in the
first year. This amount escalates over the remaining four-year
period at $7.50 per acre-foot per year. The fifteen-year water
rights lease is expected to provide 250 acre-feet per year for a
payment of $135 per acre-foot in the first year. The fees for
subsequent years are to be determined by multiplying the fee for
the first year by the ratio of the index price for each
subsequent year divided by the index price for the first year.
The index price is the sum of the price established by MWD for
full service untreated water and the price components
established by the West Basin Municipal Water District for MWD
readiness-to-serve charge and the West Basin surcharge for basic
non-interruptible water.

Future minimum leases payments under
non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) as of March 31, 2002 are:

|                             |  |              |         |        |  |       |         |  |  |   |         | 
|---------------------------- |  | ------------ | ------- | ------ |  | ----- | ------- |  |  | - | ------- | 
|                             |  | Water Rights |         | Others |  | Total
|                             |  |              |         |        |  |      
|Years ending March 31,       |  |              |         |        |  |       |         |  |  |   |         | 
|2003                         |  | $            | 207,630 |        |  |       | 87,630  |  |  |   | 295,260 | 
|2004                         |  |              | 215,190 |        |  |       | 91,135  |  |  |   | 306,325 | 
|2005                         |  |              | 33,750  |        |  |       | 7,619   |  |  |   | 41,369  | 
|2006                         |  |              | 33,750  |        |  |       |        |  |  |   | 33,750  | 
|2007                         |  |              | 33,750  |        |  |       |        |  |  |   | 33,750  | 
|Thereafter                   |  |              | 219,333 |        |  |       |        |  |  |   | 219,333 | 
|                             |  |              |         |        |  |       |         |  |  |   |         | 
|Total minimum lease payments |  | $            | 743,403 |        |  | $     | 186,384 |  |  | $ | 929,787 | 
|                             |  |              |         |        |  |       |         |  |  |   |         | 

In May 1999, the Company entered into an
agreement for the purchase of 14,000 acre-feet of water from an
unaffiliated company. In accordance with the agreement, the
Company paid the seller a deposit of 50% of the total purchase
price and agreed to pay the remainder upon periodic delivery of
the water. During the year ended March 31, 2001 the Company
took delivery of 2,000 acre-feet of this water and redelivered
the water to an unaffiliated customer. In accordance with the
terms of the purchase agreement, the Company paid the seller the
remaining 50% of the purchase price for the 2,000 acre-feet
delivered. If the Company were called upon by the seller to take
delivery and pay for the remaining 12,000 acre-feet of water,
the Company would be obligated to pay the balance of the
purchase price of $300,000. Such a payment would require the
Company to

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

use a portion of its cash reserves and could
adversely affect the Companys liquidity and capital
reserves. The Company believes that it could re-sell the water
on the same or better terms. However, no assurance can be given
that the Company could quickly re-sell the 12,000 acre-feet of
water or that the use of its cash would not adversely affect the
Companys on-going operations.

In December 1999, the Company entered into an
agreement to sell the aforementioned 14,000 acre-feet of water
to a third-party buyer at a price that includes a profit to the
Company. As noted above, during the year ended March 31, 2001
the Company delivered 2,000 acre-feet of water to this
third-party buyer. The remaining 12,000 acre-feet of water
committed to purchase by the Company but not yet delivered by
the seller cannot currently be delivered to the buyer due to a
dispute between the buyer and certain other water agencies who
control the means of conveying such water to the buyer. The
buyer and the Company have mutually acknowledged that the
dispute (which is not material to the Company) represents a
force majeure event preventing current delivery. Although the
buyer has not been able to accept delivery of the water, the
buyer has paid the Company the entire re-sale purchase price for
the full 14,000 acre-feet, as required in the re-sale contract.
The balance of this prepayment against the Companys
delivery obligation is recorded as current deferred revenue of
$824,120.

The Company is subject to claims and legal
proceedings arising in the ordinary course of business. While
complete assurance cannot be given as to the outcome of any
pending or threatened legal actions, the Company, upon advice of
its legal counsel, believes that any financial impact would not
be material to its financial position, annual operating results
or cash flows.

Note
24.     Liquidity

The Company has entered into water sale
transactions that are expected to generate water revenues, and
is attempting to complete other similar transactions. However,
while revenues from: (i) existing water sales contracts;
(ii) leasing the Companys rice farms; and
(iii) cash received from principal and interest payments on
promissory notes held by the Company will be more predictable
than periodic income received on sales of real estate or other
assets, such recurring revenues will be insufficient for some
time into the future to cover general and administrative
expenses, interest on outstanding indebtedness and dividends
when and if declared on its outstanding preferred stock.
Although the Company believes that foreseeable revenues from
operations will be insufficient to fund such operating expenses,
the Company currently plans to fund itself during the twelve
months ending March 31, 2003 from any new water revenues
that it may generate, from its existing capital resources, and
from planned sales of non-strategic assets. Currently planned
sales of non-strategic assets are expected to provide additional
cash sufficient to fund anticipated operating expenses, even if
the Company does not generate additional operating revenue.
However, in the event that the Company is unable to complete the
sale of non-strategic assets, or if the sales proceeds are
significantly less than anticipated, the Company may not have
sufficient cash available to fund its estimated expenses for the
next twelve months.

F-28



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
25.     Supplemental Disclosure of Cash
Flow Information

|                                                                            |                                                                                                      |                            |                            |         |            |      |            |           |   |             |   |           |          |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------- | ---------- | ---- | ---------- | --------- | - | ----------- | - | --------- | -------- | ------ | -
|                                                                            |                                                                                                      | 2002                       |                            | 2001    |            | 2000
|                                                                            |                                                                                                      |                            |                            |         |            |     
|Supplemental disclosure of cash flow information:                           |                                                                                                      |                            |                            |         |            |      |            |           |   |             |   |          
|                                                                            | Cash paid during the period for interest                                                             |                            | $                          | 982,067 |            |      | $          | 1,315,461 |   |             | $ | 1,197,160 |         
|                                                                            | Interest capitalized during the period                                                               |                            |                            |        |            |      |            |          |   |             |   | 83,749    |         
|                                                                            | Cash paid during the period for income taxes                                                         |                            |                            | 3,200   |            |      |            | 3,200     |   |             |   | 3,200     |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                                      |                            |                            |         |            |      |            |           |   |             |   |          
|                                                                            | Issuance of paid-in-kind Series F Preferred
    Stock dividend                                       |                            |                            | 22,167  |            |      |            |          |   |             |   |          |         
|                                                                            | Accretion of preferred stock to redemption value                                                     |                            |                            | 108,298 |            |      |            | 38,255    |   |             |   | 35,819    |         
|                                                                            | Intrinsic value of variable plan stock options:                                                      |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Deferred compensation      |                            |         | 300,000    |      |            |           |  |             |   |           |         |       
|                                                                            |                                                                                                      | Additional paid-in capital |                            |         | (300,000   | )    |            |           |  |             |   |           |          |       
|                                                                            | Transfer of assets held for sale:                                                                    |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Assets held for sale       |                            |         | 2,863,158  |      |            |           |  |             |   |           |         |       
|                                                                            |                                                                                                      | Land                       |                            |         | (553,005   | )    |            |           |  |             |   |           |         |       
|                                                                            |                                                                                                      | Water rights               |                            |         | (1,668,153 | )    |            |           |  |             |   |           |         |       
|                                                                            |                                                                                                      | Other water assets         |                            |         | (642,000   | )    |            |           |  |             |   |           |         |       
|                                                                            | Sale of land:                                                                                        |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Notes receivable           |                            |         | 102,000    |      |            |           |  |             |   |           |         |       
|                                                                            |                                                                                                      | Land                       |                            |         | (102,000   | )    |            |           |  |             |   |           |         |       
|                                                                            | Reduction of debt as a result of transfer of land
    held for sale:                                 |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Long-term debt             |                            |         |           |      |            |           |  |             |   |           | (42,000  | )     
|                                                                            |                                                                                                      | Land held for sale         |                            |         |           |      |            |           |  |             |   |           | 42,000   |       
|                                                                            | Forgiveness of note receivable and related
    accrued interest from purchase of land held for sale: |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Land held for sale         |                            |         |           |      |            |           |  |             |   |           | (365,024 | )     
|                                                                            |                                                                                                      | Note receivable            |                            |         |           |      |            |           |  |             |   |           | 343,699  |       
|                                                                            |                                                                                                      | Other current assets       |                            |         |           |      |            |           |  |             |   |           | 21,325   |       
|                                                                            | Write off of water rights and other water assets:                                                    |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Other water assets         |                            |         |           |      |            |           |  |             |   |           | (339,364 | )     
|                                                                            |                                                                                                      | Water rights               |                            |         |           |      |            |           |  |             |   |           | 826,618  |       
|                                                                            | Write-off of property, equipment and related                                                         |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      | Accumulated depreciation:  |                            |         |            |      |            |           |   |             |   |           |          |       
|                                                                            |                                                                                                      |                            | Property and equipment     |         |            |     |            |           |   | (99,108     | ) |           |          | (2,678 | )
|                                                                            |                                                                                                      |                            | Accumulated depreciation   |         |            |     |            |           |   | 99,108      |   |           |          | 134    |  
|                                                                            | Excess of carrying value over amount paid to
    retire Preferred Stock:                             |                            |                            |         |            |      |            |           |   |             |   |           |         
|                                                                            |                                                                                                      |                            | Series D Preferred Stock   |         |            |     |            |           |   | (10,000,000 | ) |           |          |       |  
|                                                                            |                                                                                                      |                            | Series F Preferred Stock   |         |            |     |            |           |   | 364,000     |   |           |          |       |  
|                                                                            |                                                                                                      |                            | Common stock               |         |            |     |            |           |   | 175         |   |           |          |       |  
|                                                                            |                                                                                                      |                            | Additional paid-in capital |         |            |     |            |           |   | 38,325      |   |           |          |       |  
|                                                                            |                                                                                                      |                            | Restricted cash            |         |            |     |            |           |   | 3,853,643   |   |           |          |       |  
|                                                                            |                                                                                                      |                            |                            |         |            |      |            |           |   |             |   |          
|                                                                            |                                                                                                      |                            |                            |         |            | $    | (5,743,857 | )         |   |             |  |          
|                                                                            |                                                                                                      |                            |                            |         |            |      |            |           |   |             |   |          

F-29



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
26.     Quarterly Financial Data
(Unaudited)

The following is a summary of quarterly results
for the fiscal years ended March 31, 2002 and 2001:

|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|------------------------------------------------------- |  | ------- | ---------- | ------------ |  | ----------- | ---------- | -------- |  |  | --------- | - |  |  | ---------- | -
|Fiscal 2002 Quarters Ended:                             |  | June 30 |            | September 30 |  | December 31 |            | March 31
|                                                        |  |         |            |              |  |             |            |         
|Water revenue                                           |  | $       | 451,740    |              |  |             | 328,729    |          |  |  | 338,033   |   |  |  | 345,698    |  
|Operating (loss) income                                 |  |         | (568,615   | )            |  |             | (694,844   | )        |  |  | (496,328  | ) |  |  | (832,934   | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Net income (loss)                                       |  | $       | (753,804   | )            |  |             | (875,845   | )        |  |  | (613,923  | ) |  |  | (1,036,822 | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Net income (loss) applicable to common
    stockholders |  | $       | (1,089,748 | )            |  | $           | (1,171,518 | )        |  |  | (631,710  | ) |  |  | (1,344,920 | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Earnings per share:  Basic and diluted                 |  | $       | (0.14      | )            |  |             | (0.15      | )        |  |  | (0.08     | ) |  |  | (0.16      | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Weighted average shares:  Basic and
    diluted        |  |         | 8,069,012  |              |  |             | 8,069,012  |          |  |  | 8,069,012 |   |  |  | 8,069,012  |  
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  

The Fiscal 2001 quarterly financial data, as
reported in the Companys previously filed Quarterly
Reports on Form 10-Q, have been adjusted to reflect the
implementation of SAB 101 in the fourth quarter of Fiscal 2001,
retroactive to April 1, 2000.

F-30



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |           | 
|--------------------------------------------------------------------------------------------------- | ------- | ------- | ---------- | ------------ |  | ----------- | -------- | --------- |  |  | --------- | --------- |  |  | ---------- | --------- | 
|Fiscal 2001 Quarters Ended:                                                                         |         | June 30 |            | September 30 |  | December 31 |          | March 31 
|                                                                                                    |         |         |            |              |  |             |          |          
|Water revenue                                                                                       |         | $       | 450,948    |              |  |             | 525,258  |           |  |  | 712,132   |           |  |  | 438,357    |          
|Loss from operations                                                                                |         |         | (598,122   | )            |  |             | (700,897 | )         |  |  | (644,531  | )         |  |  | (1,381,360 | )        
|Extraordinary gain                                                                                  |         |         |           |              |  |             |         |           |  |  | 385,477   |           |  |  | 768,617    |          
|Cumulative effect of change in accounting
    principle                                             |         |         |           |              |  |             |         |           |  |  |          |           |  |  | (237,065   | )        
|Net income (loss)                                                                                   |         | $       | (894,039   | )            |  |             | (399,172 | )         |  |  | 165,379   |           |  |  | 186,670    |          
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Net income (loss) applicable to common
    stockholders                                             |         | $       | (1,090,944 | )            |  |             | (964,554 | )         |  |  | 2,090,714 |           |  |  | 5,359,647  |          
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Earnings per share:                                                                                 |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Basic:                                                                                              |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |         | $       | (.14       | )            |  |             | (.12     | )         |  |  | .21       |           |  |  | .61        |          
|Extraordinary income on extinguishments of debt                                                     |         |         |           |              |  |             |         |           |  |  | .05       |           |  |  | .10        |          
|Cumulative effect of change in accounting
    principle                                             |         |         |           |              |  |             |         |           |  |  |          |           |  |  | (.03       | )        
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|                                                                                                    |         | $       | (.14       | )            |  |             | (.12     | )         |  |  | .26       |           |  |  | .68        |          
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Diluted:                                                                                            |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |         | $       | (.14       | )            |  |             | (.12     | )         |  |  | .18       |           |  |  | .52        |          
|Extraordinary income on extinguishments of debt                                                     |         |         |           |              |  |             |         |           |  |  | .04       |           |  |  | .08        |          
|Cumulative effect of change in accounting
    principle                                             |         |         |           |              |  |             |         |           |  |  |          |           |  |  | (.02       | )        
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|                                                                                                    |         | $       | (.14       | )            |  |             | (.12     | )         |  |  | .22       |           |  |  | .58        |          
|                                                                                                    |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|Weighted average shares:                                                                            |         |         |            |              |  |             |          |           |  |  |           |           |  |  |            |          
|                                                                                                    | Basic   |         |            | 7,894,012    |  |             |          | 7,894,012 |  |  |           | 7,894,012 |  |  |            | 8,069,012 | 
|                                                                                                    | Diluted |         |            | 7,894,012    |  |             |          | 7,894,012 |  |  |           | 9,611,544 |  |  |            | 9,468,501 | 

F-31